Edgar Filing: Pacific Ethanol, Inc.

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 22, 2005
REGISTRATION NO. 333-127714
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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PACIFIC ETHANOL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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DELAWARE 41-2170618
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

2860
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)

5711 N. WEST AVENUE
FRESNO, CALIFORNIA 93711
(559) 435-1771
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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NEIL M. KOEHLER, CHIEF EXECUTIVE OFFICER
PACIFIC ETHANOL, INC.
5711 N. WEST AVENUE
FRESNO, CALIFORNIA 93711
(559) 435-1771 / (559) 435-1478 (FAX)
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)

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COPIES OF ALL CORRESPONDENCE TO:
LARRY A. CERUTTI, ESQ.
JOHN T. BRADLEY, ESQ.
RUTAN & TUCKER, LLP
611 ANTON BOULEVARD, 14TH FLOOR
COSTA MESA, CALIFORNIA 92626
(714) 641-5100 / (714) 546-9035 (FAX)

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. |_|

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CALCULATION OF REGISTRATION FEE
===============================================================================================================
Amount Proposed maximum Proposed maximum
Title of each class of to be offering price aggregate Amount of
securities to be registered registered(1) per share(2)(4) offering price(2)(4) registration fee
---------------------------------------------------------------------------------------------------------------

Common stock, $.001 par value 11,778,454(3) $9.05 $106,595,009 $12,154(4)
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(1) In the event of a stock split, stock dividend, anti-dilution adjustment or
similar transaction involving common stock of the registrant, in order to
prevent dilution, the number of shares registered shall be automatically
increased to cover the additional shares in accordance with Rule 416(a)
under the Securities Act.
(2) The proposed maximum offering price per share has been estimated solely for
the purpose of calculating the registration fee pursuant to Rule 457(c) of
the Securities Act of 1933 and is based upon the average of high and low
sales prices of the Registrant's common stock on the Nasdaq National Market
on October 28, 2005.
(3) Includes 2,952,587 shares of common stock issuable upon exercise of
warrants.

(4) A registration fee of $11,861 was paid with the initial filing of this
registration statement based on an initial number of shares of common stock
to be registered of 11,503,454, a proposed maximum offering price per share
of $8.76 and a proposed maximum aggregate offering price of $100,770,257
pursuant to Rule 457(c) of the Securities Act of 1933 and was based upon
the average of high and low sales prices of the Registrant's common stock
on the Nasdaq Capital Market (formerly, the Nasdaq SmallCap Market) on
August 17, 2005. An additional registration fee of $293 was paid with the
filing of Amendment no. 1 to this registration statement based on an
additional number of shares of common stock to be registered of 275,000, a
proposed maximum offering price per share of $9.05 and a proposed maximum
aggregate offering price for these shares of $2,488,750 pursuant to Rule
457(c) of the Securities Act of 1933 and was based upon the average of high
and low sales prices of the Registrant's common stock on the Nasdaq
National Market on October 28, 2005.

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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

================================================================================

SUBJECT TO COMPLETION, DATED NOVEMBER 22, 2005

PROSPECTUS

11,778,454 SHARES

PACIFIC ETHANOL, INC.

COMMON STOCK

---------------------

This a public offering of 11,778,454 shares of our common stock, including
an aggregate of 8,825,867 issued and outstanding shares of our common stock and
an aggregate of 2,952,587 shares of our common stock underlying warrants. All
shares are being offered by selling security holders identified in this
prospectus. We will not receive any of the proceeds from the sale of shares by
the selling security holders. Ryan W. Turner, our Chief Operating Officer and
Secretary, is a named co-beneficiary of the Turner Family Trust dated February
18, 2004, one of the selling security holders. Our common stock is quoted on the
Nasdaq National Market under the symbol "PEIX." On November 21, 2005, the
closing sale price of our common stock on the Nasdaq National Market was $13.12
per share.

The mailing address and the telephone number of our principal executive
offices are 5711 N. West Avenue, Fresno, California 93711, (559) 435-1771.

---------------------

Investing in our shares of common stock involves risks. See "Risk Factors"
beginning on page 7 for factors you should consider before buying shares of our
common stock.

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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

THE DATE OF THIS PROSPECTUS IS , 2005.

TABLE OF CONTENTS
Page
----

Prospectus Summary............................................................2
Risk Factors..................................................................7
Special Note Regarding Forward-Looking Statements............................16
Use of Proceeds..............................................................16
Dividend Policy..............................................................16
Price Range of Common Stock..................................................18
Capitalization...............................................................19
Selected Consolidated Historical Financial Data..............................20
Unaudited Condensed Consolidated Pro Forma Financial Data....................21
Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................24
Business.....................................................................38
Management...................................................................53
Certain Relationships and Related Transactions...............................63
Principal Stockholders.......................................................70
Selling Security Holders.....................................................72
Plan of Distribution.........................................................88
Description of Capital Stock.................................................90
Legal Matters................................................................92
Experts......................................................................93
Where You Can Find Additional Information....................................93
Index to Financial Statements...............................................F-1

PROSPECTUS SUMMARY

TO FULLY UNDERSTAND THIS OFFERING AND ITS CONSEQUENCES TO YOU, YOU SHOULD
READ THE FOLLOWING SUMMARY ALONG WITH THE MORE DETAILED INFORMATION AND OUR
CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS APPEARING
ELSEWHERE IN THIS PROSPECTUS. IN THIS PROSPECTUS, THE WORDS "WE," "US," "OUR"
AND SIMILAR TERMS REFER TO PACIFIC ETHANOL, INC., A DELAWARE CORPORATION,
TOGETHER WITH ITS SUBSIDIARIES UNLESS THE CONTEXT PROVIDES OTHERWISE.

PACIFIC ETHANOL, INC.

Our primary goal is to become a leader in the production, marketing and
sale of ethanol and other renewable fuels in the Western United States.

We believe that we have a competitive advantage due to the market niche
that we have developed by supplying ethanol to customers in several major
metropolitan and rural markets in California and other Western states. We also
believe that the experience of our management over the past two decades and the
operations Kinergy has conducted over the past four years have enabled us to
establish valuable relationships in the ethanol marketing industry and
understand the business of marketing ethanol.

Through our wholly-owned subsidiary, Pacific Ethanol California, Inc., or
PEI California, we are constructing an ethanol production facility in Madera
County, California, to begin the production and sale of ethanol and its
co-products if we are able to secure all the necessary financing to complete
construction of this facility. To date, we have not obtained all of this
financing. See "Risk Factors." We also intend to construct or otherwise acquire
one or more additional ethanol production facilities as financing resources and
business prospects make the construction or acquisition of these facilities
advisable. PEI California has, to date, not conducted any significant business
operations other than the acquisition of real property located in Madera County
on which we are constructing our first ethanol production facility.

Our wholly-owned subsidiary, ReEnergy, LLC, or ReEnergy, does not presently
have any significant business operations or plans but does hold an option to
acquire real property in Visalia, California, on which we intend to build an
ethanol production facility. In addition, we have secured an option to acquire
an additional parcel of real property and an option to lease two other parcels
of real property on which we may construct additional ethanol production
facilities.

In March 2005, we completed a share exchange transaction, or the Share
Exchange Transaction, with the shareholders of PEI California, and the holders
of the membership interests of each of Kinergy and ReEnergy. Upon completion of
the Share Exchange Transaction, we acquired all of the issued and outstanding
shares of capital stock of PEI California and all of the outstanding membership
interests of each of Kinergy and ReEnergy. Immediately prior to the consummation
of the Share Exchange Transaction, our predecessor, Accessity Corp., a New York
corporation, or Accessity, reincorporated in the State of Delaware under the
name Pacific Ethanol, Inc.

In connection with the Share Exchange Transaction, we issued an aggregate
of 20,610,987 shares of common stock to the shareholders of PEI California,
3,875,000 shares of common stock to the limited liability company member of
Kinergy and an aggregate of 125,000 shares of common stock to the limited
liability company members of ReEnergy. In addition, holders of options and
warrants to acquire an aggregate of 3,157,587 shares of common stock of PEI
California were, following the consummation of the Share Exchange Transaction,
deemed to hold warrants to acquire an equal number of our shares of common
stock. Also, a holder of a promissory note convertible into an aggregate of
664,879 shares of common stock of PEI California based on a then outstanding
principal amount of $997,318 was, following the consummation of the Share
Exchange Transaction, entitled to convert the note into an equal number of
shares of our common stock.

Prior to the Share Exchange Transaction, through its wholly-owned
subsidiary Sentaur Corp., Accessity was in the business of providing medical
billing recovery services for hospitals. Sentaur Corp's services were designed
to help hospitals recoup discounts improperly taken by insurance companies and
other institutional payors of medical treatments. In addition, through its
wholly-owned subsidiary DriverShield CRM Corp., Accessity was in the business of
providing internet-based vehicle repair management services, including collision
and general repair programs, estimating and auditing services and vehicle
rentals for insurance companies and affinity group members.

CORPORATE INFORMATION

Our principal executive offices are located 5711 N. West Avenue, Fresno,
California 93711. Our telephone number is (559) 435-1771. Our Internet address
is http://www.pacificethanol.net. Information contained on, or that is
accessible through, our websites should not be considered to be part of this
prospectus.

THE OFFERING

Common stock offered by the selling
security holders 11,778,454 shares

Common stock outstanding prior to
this offering 28,667,185 shares

Common stock to be outstanding after
this offering 31,619,772 shares*

Use of proceeds All proceeds of this offering will
be received by selling security
holders for their own accounts.
See "Use of Proceeds."

Nasdaq National Market symbol PEIX

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* Represents 28,667,185 shares of common stock currently outstanding plus
2,952,587 shares of common stock underlying warrants. Other than the 2,952,587
shares of common stock underlying warrants, all shares of common stock offered
by the selling security holders are issued and outstanding.

The number of shares of common stock being offered by the selling security
holders includes 8,825,867 outstanding shares of common stock held by certain
security holders and assumes the exercise of warrants whose underlying shares of
common stock are covered by this prospectus in exchange for 2,952,587 shares of
common stock, and the immediate resale of all of those 11,778,454 shares of
common stock. The number of shares of common stock that will be outstanding upon
the completion of this offering is based on the 28,667,185 shares outstanding as
of November 21, 2005, and excludes the following:

o 105,000 shares of common stock reserved for issuance under our Amended
1995 Incentive Stock Plan, of which options to purchase 105,000 shares
were outstanding as of that date, at a weighted average exercise price
of $4.94 per share;

o 2,500,000 shares of common stock reserved for issuance under our 2004
Stock Option Plan, of which options to purchase 822,500 shares were
outstanding as of that date, at a weighted average exercise price of
$7.78 per share;
o 172,501 shares of common stock underlying warrants outstanding as of
that date, not including warrants covered by the registration
statement of which this prospectus is a part, at an exercise price of
$0.0001 per share; and
o any additional shares of common stock we may issue from time to time
after that date.

You should read the discussion under "Management -- Stock Option Plans" for
additional information about our stock option plans.

SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA

The following financial data should be read in conjunction with the
consolidated financial statements and the notes to those statements beginning on
page F-1 of this prospectus, and the section entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this prospectus. The consolidated statements of operations data for
the nine months ended September 30, 2005 and 2004 and the consolidated balance
sheet data as of September 30, 2005 and 2004 are derived from unaudited
financial statements included in the prospectus that, in the opinion of our
management, reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial data for these periods.

The consolidated statements of operations data for the years ended December
31, 2004 and 2003 and the consolidated balance sheet data at December 31, 2004
and 2003 are derived from the consolidated audited financial statements included
in this prospectus. The historical results that appear below are not necessarily
indicative of results to be expected for any future periods.

NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
---------------------------- ----------------------------
2005 2004 2004 2003
------------ ------------ ------------ ------------

CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales ............................................... $ 51,530,735 $ 16,832 $ 19,764 $ 1,016,594
Cost of goods sold ...................................... 49,695,870 10,789 12,523 946,012
------------ ------------ ------------ ------------
Gross profit ............................................ 1,834,865 6,043 7,241 70,582
Selling, general and administrative expenses ............ 3,999,653 714,730 1,070,010 647,731
Services rendered in connection with feasibility study .. 852,250 -- -- --
Non-cash compensation and consulting fees ............... 1,749,967 862,500 1,207,500 --
------------ ------------ ------------ ------------
Loss from operations .................................... (4,767,005) (1,571,187) (2,270,269) (577,149)
Total other expense ..................................... (33,740) (413,358) (530,698) (279,930)
------------ ------------ ------------ ------------
Loss from operations before income taxes ................ (4,800,745) (1,984,545) (2,800,967) (857,079)
Provision for income taxes .............................. 5,600 8,400 1,600 1,600
------------ ------------ ------------ ------------
Net loss ................................................ $ (4,806,345) $ (1,992,945) $ (2,802,567) $ (858,679)
============ ============ ============ ============
Loss per share, basic and diluted ....................... $ (0.20) $ (0.17) $ (0.23) $ (0.09)
============ ============ ============ ============
Weighted-average shares outstanding, basic and diluted .. 23,841,380 12,064,684 12,396,895 9,578,866
============ ============ ============ ============
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents ............................... $ 11,344,034 $ 220,908 $ 42 $ 249,084
Working capital (deficit) ............................... 11,306,924 (558,005) (1,024,747) (357,576)
Total assets ............................................ 40,344,874 7,502,714 7,179,263 6,559,634
Stockholders' equity .................................... 32,350,797 1,841,830 1,355,732 1,367,828

No cash dividends on our common stock were declared during any of the
periods presented above.

Various factors materially affect the comparability of the information
presented in the above table. These factors relate primarily to a Share Exchange
Transaction that was consummated on March 23, 2005 with the shareholders of PEI
California, and the holders of the membership interests of each of Kinergy and
ReEnergy, pursuant to which we acquired all of the issued and outstanding
capital stock of PEI California and all of the outstanding membership interests
of Kinergy and ReEnergy. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Overview."

SUMMARY UNAUDITED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL DATA

The following tables present a summary of our unaudited condensed
consolidated pro forma financial data for the nine months ended September 30,
2005 and the year ended December 31, 2004. You should read this financial data
together with "Unaudited Condensed Consolidated Pro Forma Financial Data,"
"Selected Historical Consolidated Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and our historical
audited and unaudited consolidated financial statements and the related notes
thereto and the historical audited financial statements of Kinergy and ReEnergy
appearing elsewhere in this prospectus.

On March 23, 2005, we completed a Share Exchange Transaction with the
shareholders of PEI California and the holders of the membership interests of
each of Kinergy and ReEnergy, pursuant to which we acquired all of the issued
and outstanding capital stock of PEI California and all of the outstanding
membership interests of Kinergy and ReEnergy. This transaction has been
accounted for as a reverse acquisition whereby PEI California is the accounting
acquiror. Accordingly, the unaudited condensed consolidated statements of
operations data for the year ended December 31, 2004 give effect to the
acquisition by PEI California of Accessity, Kinergy and ReEnergy as if the
acquisitions had been consummated on January 1, 2004. Pro forma condensed
consolidated balance sheet data is not presented because the balance sheets of
Accessity, Kinergy and ReEnergy and related purchase accounting adjustments are
consolidated and included in the financial statements included in our quarterly
report on Form 10-QSB for the quarterly period ended September 30, 2005 filed
with the Securities and Exchange Commission on November 14, 2005. Pro forma
adjustments for Accessity are not included because they would have no material
impact on the pro forma financial information presented.

The summary unaudited condensed consolidated pro forma financial data are
presented for illustrative purposes only and do not represent what our results
of operations actually would have been if the transactions referred to above had
occurred as of the dates indicated or what our results of operations will be for
future periods. The presented information does not include certain cost savings
and operational synergies that we expect to achieve upon fully consolidating our
acquisitions.

NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 2005 DECEMBER 31, 2004
----------------------------- -----------------------------
PRO FORMA PRO FORMA
PACIFIC ETHANOL PACIFIC ETHANOL
PACIFIC AND PACIFIC AND
ETHANOL ACQUISITIONS ETHANOL ACQUISITIONS
------------ ------------ ------------ ------------

CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales ................................................ $ 51,530,735 $ 75,135,987 $ 19,764 $ 82,810,168
Cost of goods sold ....................................... 49,695,870 72,903,472 12,523 79,593,420
------------ ------------ ------------ ------------
Gross profit ............................................. 1,834,865 2,232,515 7,241 3,216,748
Selling, general and administrative expenses ............. 3,999,653 4,323,311 1,070,010 2,686,452
Services rendered in connection with feasibility study ... 852,250 852,250 -- 852,250
Non-cash compensation and consulting fees ................ 1,749,967 1,996,831 1,207,500 2,681,750
------------ ------------ ------------ ------------
Loss from operations ..................................... (4,767,005) (4,939,877) (2,270,269) (3,003,704)
Total other expense ...................................... (33,740) (33,124) (530,698) (535,535)
------------ ------------ ------------ ------------
Loss from operations before income taxes ................. (4,800,745) (4,973,001) (2,800,967) (3,539,239)
Provision for income taxes ............................... 5,600 6,400 1,600 2,400
------------ ------------ ------------ ------------
Net loss ................................................. $ (4,806,345) $ (4,979,401) $ (2,802,567) $ (3,541,639)
============ ============ ============ ============
Loss per share, basic and diluted ........................ $ (0.20) $ (0.18) $ (0.23) $ (0.13)
============ ============ ============ ============
Weighted-average shares outstanding, basic and diluted ... 23,841,380 28,021,756 12,396,895 26,486,309
============ ============ ============ ============

RISK FACTORS

THE FOLLOWING SUMMARIZES MATERIAL RISKS THAT YOU SHOULD CAREFULLY CONSIDER
BEFORE YOU DECIDE TO BUY OUR COMMON STOCK IN THIS OFFERING. ANY OF THE FOLLOWING
RISKS, IF THEY ACTUALLY OCCUR, WOULD LIKELY HARM OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. AS A RESULT, THE TRADING PRICE OF OUR
COMMON STOCK COULD DECLINE, AND YOU COULD LOSE THE MONEY YOU PAID TO BUY OUR
COMMON STOCK.

RISKS RELATED TO OUR COMBINED OPERATIONS

WE HAVE INCURRED SIGNIFICANT LOSSES IN THE PAST AND WE MAY INCUR SIGNIFICANT
LOSSES IN THE FUTURE. IF WE CONTINUE TO INCUR LOSSES, WE WILL EXPERIENCE
NEGATIVE CASH FLOW, WHICH MAY HAMPER OUR OPERATIONS, MAY PREVENT US FROM
EXPANDING OUR BUSINESS AND MAY CAUSE OUR STOCK PRICE TO DECLINE.

We have incurred losses in the past. As of September 30, 2005, we had an
accumulated deficit of approximately $8.5 million. For the nine months ended
September 30, 2005, we incurred a net loss of approximately $4.8 million. We
expect to incur losses for the foreseeable future and at least until the
completion of our initial ethanol production facility in Madera County,
California. We estimate that the earliest completion date of this facility and,
as a result, our earliest date of ethanol production, will not occur until the
fourth quarter of 2006. We expect to rely on cash from operations and debt and
equity financing to fund all of the cash requirements of our business. If our
net losses continue, we will experience negative cash flow, which may hamper
current operations and may prevent us from expanding our business. We may be
unable to attain, sustain or increase profitability on a quarterly or annual
basis in the future. If we do not achieve, sustain or increase profitability our
stock price may decline.

THE HIGH CONCENTRATION OF OUR SALES WITHIN THE ETHANOL PRODUCTION AND
MARKETING INDUSTRY COULD RESULT IN A SIGNIFICANT REDUCTION IN SALES AND
NEGATIVELY AFFECT OUR PROFITABILITY IF DEMAND FOR ETHANOL DECLINES.

Our revenue is and will continue to be derived primarily from sales of
ethanol. Currently, the predominant oxygenate used to blend with gasoline is
ethanol. Ethanol competes with several other existing products and other
alternative products could also be developed for use as fuel additives. We
expect to be completely focused on the production and marketing of ethanol and
its co-products for the foreseeable future. We may be unable to shift our
business focus away from the production and marketing of ethanol to other
renewable fuels or competing products. Accordingly, an industry shift away from
ethanol or the emergence of new competing products may reduce the demand for
ethanol. A downturn in the demand for ethanol would significantly and adversely
affect our sales and profitability.

WE PLAN TO FUND A SUBSTANTIAL MAJORITY OF THE CONSTRUCTION COSTS OF OUR
PLANNED ETHANOL PRODUCTION FACILITIES THROUGH THE ISSUANCE OF A SIGNIFICANT
AMOUNT OF DEBT, RESULTING IN SUBSTANTIAL DEBT SERVICE REQUIREMENTS THAT COULD
REDUCE THE VALUE OF YOUR INVESTMENT.

We plan to fund a substantial majority of the construction costs of our
planned ethanol production facilities through the issuance of a significant
amount of debt. For example, we anticipate that we will need to raise an
additional $60.0 million in debt financing to complete construction of our first
ethanol production facility in Madera County. As a result, our capital structure
will be highly leveraged. Our debt levels and debt service requirements could
have important consequences which could reduce the value of your investment,
including:

o limiting our ability to borrow additional amounts for operating
capital or other purposes and causing us to be able to borrow
additional funds only on unfavorable terms;
o reducing funds available for operations and distributions because a
substantial portion of our cash flow will be used to pay interest and
principal on our debt;
o making us vulnerable to increases in prevailing interest rates;
o placing us at a competitive disadvantage because we may be
substantially more leveraged than some of our competitors;
o subjecting all or substantially all of our assets to liens, which
means that there may be no assets left for our stockholders in the
event of a liquidation; and
o limiting our ability to adjust to changing market conditions, which
could increase our vulnerability to a downturn in our business or
general economic conditions.

If we are unable to pay our debt service obligations, we could be forced to
reduce or eliminate dividends to our stockholders, if they were to commence,
and/or reduce or eliminate needed capital expenditures. It is possible that we
could be forced to sell assets, seek to obtain additional equity capital or
refinance or restructure all or a portion of our debt on substantially less
favorable terms. In the event that we are unable to refinance all or a portion
of our debt or raise funds through asset sales, sales of equity or otherwise, we
may be forced to liquidate and you could lose your entire investment.

GOVERNMENTAL REGULATIONS OR THE REPEAL OR MODIFICATION OF VARIOUS TAX
INCENTIVES FAVORING THE USE OF ETHANOL COULD REDUCE THE DEMAND FOR ETHANOL
AND CAUSE OUR SALES AND PROFITABILITY TO DECLINE.

Our business is subject to extensive regulation by federal, state and local
governmental agencies. We cannot predict in what manner or to what extent
governmental regulations will harm our business or the ethanol production and
marketing industry in general. For example the recent energy bill signed into
law by President Bush includes a national renewable fuels standard that requires
refiners to blend a percentage of renewable fuels into gasoline. This
legislation replaces the current oxygenate requirements in the State of
California and may potentially decrease the demand for ethanol in the State of
California. If the demand for ethanol in the State of California decreases, our
sales and profitability would decline.

The fuel ethanol business benefits significantly from tax incentive
policies and environmental regulations that favor the use of ethanol in motor
fuel blends in the United States. Currently, a gasoline marketer that sells
gasoline without ethanol must pay a federal tax of $0.18 per gallon compared to
$0.13 per gallon for gasoline that is blended with 10% ethanol. Smaller credits
are available for gasoline blended with lesser percentages of ethanol. The
repeal or substantial modification of the federal excise tax exemption for
ethanol-blended gasoline or, to a lesser extent, other federal or state policies
and regulations that encourage the use of ethanol could have a detrimental
effect on the ethanol production and marketing industry and materially and
adversely affect our sales and profitability.

VIOLATIONS OF ENVIRONMENTAL REGULATIONS COULD SUBJECT US TO SEVERE PENALTIES
AND MATERIALLY AND ADVERSELY AFFECT OUR SALES AND PROFITABILITY.

The production and sale of ethanol is subject to regulation by agencies of
the federal government, including, but not limited to, the Environmental
Protection Agency, or the EPA, as well as other agencies in each jurisdiction in
which ethanol is produced, sold, stored or transported. Environmental laws and
regulations that affect our operations, and that are expected to affect our
planned operations, are extensive and have become progressively more stringent.
Applicable laws and regulations are subject to change, which could be made
retroactively. Violations of environmental laws and regulations or permit
conditions can result in substantial penalties, injunctive orders compelling
installation of additional controls, civil and criminal sanctions, permit
revocations and/or facility shutdowns. If significant unforeseen liabilities
arise for corrective action or other compliance, our sales and profitability
could be materially and adversely affected.

WE RELY HEAVILY ON OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER, NEIL M.
KOEHLER. THE LOSS OF HIS SERVICES COULD ADVERSELY AFFECT OUR ABILITY TO
SOURCE ETHANOL FROM OUR KEY SUPPLIERS AND OUR ABILITY TO SELL ETHANOL TO OUR
CUSTOMERS.

Our success depends, to a significant extent, upon the continued services
of Neil M. Koehler, who is our President and Chief Executive Officer. For
example, Mr. Koehler has developed key personal relationships with our ethanol
suppliers and customers. We greatly rely on these relationships in the conduct
of our operations and the execution of our business strategies. The loss of Mr.
Koehler could, therefore, result in the loss of our favorable relationships with
one or more of our ethanol suppliers and customers. In addition, Mr. Koehler has
considerable experience in the construction, start-up and operation of ethanol
production facilities and in the ethanol marketing business. Although we have
entered into an employment agreement with Mr. Koehler, that agreement is of
limited duration and is subject to early termination by Mr. Koehler under
certain circumstances. In addition, we do not maintain "key person" life
insurance covering Mr. Koehler or any other executive officer. The loss of Mr.
Koehler could also significantly delay or prevent the achievement of our
business objectives.

THE ETHANOL PRODUCTION AND MARKETING INDUSTRY IS EXTREMELY COMPETITIVE. MANY
OF OUR SIGNIFICANT COMPETITORS HAVE GREATER FINANCIAL AND OTHER RESOURCES
THAN WE DO AND ONE OR MORE OF THESE COMPETITORS COULD USE THEIR GREATER
RESOURCES TO GAIN MARKET SHARE AT OUR EXPENSE. IN ADDITION, CERTAIN OF OUR
SUPPLIERS MAY CIRCUMVENT OUR MARKETING SERVICES, CAUSING OUR SALES AND
PROFITABILITY TO DECLINE.

The ethanol production and marketing industry is extremely competitive.
Many of our significant competitors in the ethanol production and marketing
industry, such as Archer-Daniels-Midland Company, or ADM, have substantially
greater production, financial, research and development, personnel and marketing
resources than we do. In addition, we are not currently producing any ethanol
that we sell and therefore are unable to capture the higher gross profit margins
generally associated with production activities. As a result, our competitors,
who are presently producing ethanol, may have greater relative advantages
resulting from greater capital resources due to higher gross profit margins. As
a result, our competitors may be able to compete more aggressively and sustain
that competition over a longer period of time than we could. Our lack of
resources relative to many of our significant competitors may cause us to fail
to anticipate or respond adequately to new developments and other competitive
pressures. This failure could reduce our competitiveness and cause a decline in
our market share, sales and profitability.

In addition, some of our suppliers are potential competitors and,
especially if the price of ethanol remains at historically high levels, they may
seek to capture additional profits by circumventing our marketing services in
favor of selling directly to our customers. If one or more of our major
suppliers, or numerous smaller suppliers, circumvent our marketing services, our
sales and profitability will decline.

OUR FAILURE TO MANAGE OUR GROWTH EFFECTIVELY COULD PREVENT US FROM ACHIEVING
OUR GOALS.

Our strategy envisions a period of rapid growth that may impose a
significant burden on our administrative and operational resources. The growth
of our business, and in particular, the completion of construction of our
planned ethanol production facilities, will require significant investments of
capital and management's close attention. In addition to our plans to construct
additional ethanol production facilities after the completion of our first
facility in Madera County, we have recently entered into significant marketing
agreements with Front Range Energy, LLC and Phoenix Bio-Industries, LLC, and we
are seeking to enter into additional similar agreements with companies that
currently, or expect to, produce ethanol, all of which may result in a

substantial growth in our marketing business. Our ability to effectively manage
our growth will require us to substantially expand the capabilities of our
administrative and operational resources and to attract, train, manage and
retain qualified management, technicians and other personnel. We may be unable
to do so. In addition, our failure to successfully manage our growth could
result in our sales not increasing commensurately with our capital investments.
If we are unable to successfully manage our growth, we may be unable to achieve
our goals.

RISKS RELATING TO THE BUSINESS OF KINERGY

KINERGY'S PURCHASE AND SALE COMMITMENTS AS WELL AS ITS INVENTORY OF ETHANOL
HELD FOR SALE SUBJECT US TO THE RISK OF FLUCTUATIONS IN THE PRICE OF ETHANOL,
WHICH MAY RESULT IN LOWER OR EVEN NEGATIVE GROSS PROFIT MARGINS AND WHICH
COULD MATERIALLY AND ADVERSELY AFFECT OUR PROFITABILITY.

Kinergy's purchases and sales of ethanol are not always matched with sales
and purchases of ethanol at prevailing market prices. Kinergy commits from time
to time to the sale of ethanol to its customers without corresponding and
commensurate commitments for the supply of ethanol from its suppliers, which
subjects us to the risk of an increase in the price of ethanol. Kinergy also
commits from time to time to the purchase of ethanol from its suppliers without
corresponding and commensurate commitments for the purchase of ethanol by its
customers, which subjects us to the risk of a decline in the price of ethanol.
In addition, Kinergy increases inventory levels in anticipation of rising
ethanol prices and decreases inventory levels in anticipation of declining
ethanol prices. As a result, Kinergy is subject to the risk of ethanol prices
moving in unanticipated directions, which could result in declining or even
negative gross profit margins. Accordingly, our business is subject to
fluctuations in the price of ethanol and these fluctuations may result in lower
or even negative gross margins and which could materially and adversely affect
our profitability.

KINERGY DEPENDS ON A SMALL NUMBER OF CUSTOMERS FOR THE VAST MAJORITY OF ITS
SALES. A REDUCTION IN BUSINESS FROM ANY OF THESE CUSTOMERS COULD CAUSE A
SIGNIFICANT DECLINE IN OUR OVERALL SALES AND PROFITABILITY.

The vast majority of Kinergy's sales are generated from a small number of
customers. During the first nine months of 2005, sales to Kinergy's two largest
customers that provided 10% or more of total sales represented approximately 17%
and 12%, respectively, representing an aggregate of approximately 29%, of our
total sales. During 2004, sales to Kinergy's four largest customers that
provided 10% or more of the total sales represented approximately 13%, 12%, 12%
and 12%, respectively, representing an aggregate of approximately 49%, of our
total sales. We expect that Kinergy will continue to depend for the foreseeable
future upon a small number of customers for a significant majority of its sales.
Kinergy's agreements with these customers generally do not require them to
purchase any specified amount of ethanol or dollar amount of sales or to make
any purchases whatsoever. Therefore, in any future period, Kinergy's sales
generated from these customers, individually or in the aggregate, may not equal
or exceed historical levels. If sales to any of these customers cease or
decline, Kinergy may be unable to replace these sales with sales to either
existing or new customers in a timely manner, or at all. A cessation or
reduction of sales to one or more of these customers could cause a significant
decline in our overall sales and profitability.

KINERGY'S LACK OF LONG-TERM ETHANOL ORDERS AND COMMITMENTS BY ITS CUSTOMERS
COULD LEAD TO A RAPID DECLINE IN OUR SALES AND PROFITABILITY.

Kinergy cannot rely on long-term ethanol orders or commitments by its
customers for protection from the negative financial effects of a decline in the
demand for ethanol or a decline in the demand for Kinergy's services. The
limited certainty of ethanol orders can make it difficult for us to forecast our
sales and allocate our resources in a manner consistent with our actual sales.

Moreover, our expense levels are based in part on our expectations of future
sales and, if our expectations regarding future sales are inaccurate, we may be
unable to reduce costs in a timely manner to adjust for sales shortfalls.
Furthermore, because Kinergy depends on a small number of customers for the vast
majority of its sales, the magnitude of the ramifications of these risks is
greater than if Kinergy's sales were less concentrated within a small number of
customers. As a result of Kinergy's lack of long-term ethanol orders and
commitments, we may experience a rapid decline in our sales and profitability.

KINERGY DEPENDS ON A SMALL NUMBER OF SUPPLIERS FOR THE VAST MAJORITY OF THE
ETHANOL THAT IT SELLS. IF ANY OF THESE SUPPLIERS IS UNABLE OR DECIDES NOT TO
CONTINUE TO SUPPLY KINERGY WITH ETHANOL IN ADEQUATE AMOUNTS, KINERGY MAY BE
UNABLE TO SATISFY THE DEMANDS OF ITS CUSTOMERS AND OUR SALES, PROFITABILITY
AND RELATIONSHIPS WITH OUR CUSTOMERS WILL BE ADVERSELY AFFECTED.

Kinergy depends on a small number of suppliers for the vast majority of the
ethanol that it sells. During the first nine months of 2005, Kinergy's four
largest suppliers that provided 10% or more of total purchases made represented
approximately 28%, 21%, 19% and 11%, respectively, representing an aggregate of
approximately 80%, of the total ethanol Kinergy purchased for resale. During
2004, Kinergy's three largest suppliers that provided 10% or more of the total
purchases made represented approximately 27%, 23% and 14%, respectively,
representing an aggregate of approximately 64% of the total ethanol Kinergy
purchased for resale. We expect that Kinergy will continue to depend for the
foreseeable future upon a small number of suppliers for a significant majority
of the ethanol that it purchases. In addition, Kinergy sources the ethanol that
it sells primarily from suppliers in the Midwestern United States. The delivery
of the ethanol that Kinergy sells is therefore subject to delays resulting from
inclement weather and other conditions. Also, there is currently a substantial
demand for ethanol which has, for most of 2005, far exceeded ethanol production
capacities and Kinergy's management has, from time to time, found it very
difficult to satisfy all the demands for ethanol by Kinergy's customers. If any
of these suppliers is unable or declines for any reason to continue to supply
Kinergy with ethanol in adequate amounts, Kinergy may be unable to replace that
supplier and source other supplies of ethanol in a timely manner, or at all, to
satisfy the demands of its customers. If this occurs, our sales and
profitability and Kinergy's relationships with its customers will be adversely
affected.

RISKS RELATING TO THE BUSINESS OF PEI CALIFORNIA

THE COMPLETION OF CONSTRUCTION OF OUR PLANNED ETHANOL PRODUCTION FACILITIES
WILL REQUIRE SIGNIFICANT ADDITIONAL FUNDING, WHICH WE EXPECT TO RAISE THROUGH
DEBT AND EQUITY FINANCING. WE MAY NOT BE SUCCESSFUL IN RAISING ADEQUATE
CAPITAL WHICH MAY FORCE US TO ABANDON CONSTRUCTION OF ONE OR MORE, OR EVEN
ALL, OF OUR PLANNED ETHANOL PRODUCTION FACILITIES.

In order to complete the construction of the various planned ethanol
production facilities, we will require significant additional funding. For
example, we anticipate that we will need to raise an additional $60.0 million in
debt financing to complete construction of our first ethanol production facility
in Madera County. We have no contracts with or binding commitments from any
bank, lender or financial institution for this debt financing. We may not be
able to obtain any funding from one or more lenders, or if funding is obtained,
that it will be on terms that we have anticipated or that are otherwise
acceptable to us. If we are unable to secure adequate debt financing, or debt
financing on acceptable terms is unavailable for any reason, we may be forced to
abandon our construction of one or more, or even all, of our planned ethanol
production facilities.

PEI CALIFORNIA HAS NOT CONDUCTED ANY SIGNIFICANT BUSINESS OPERATIONS AND HAS
BEEN UNPROFITABLE TO DATE. IF PEI CALIFORNIA FAILS TO COMMENCE SIGNIFICANT
BUSINESS OPERATIONS, IT WILL BE UNSUCCESSFUL, WILL DECREASE OUR OVERALL
PROFITABILITY AND WE WILL HAVE FAILED TO ACHIEVE ONE OF OUR SIGNIFICANT
GOALS.

PEI California has not conducted any significant business operations and
has been unprofitable to date. Accordingly, there is no prior operating history
by which to evaluate the likelihood of PEI California's success or its
contribution to our overall profitability. PEI California may never complete
construction of an ethanol production facility and commence significant
operations or, if PEI California does complete the construction of an ethanol
production facility, PEI California may not be successful or contribute
positively to our profitability. If PEI California fails to commence significant
business operations, it will be unsuccessful and will decrease our overall
profitability and we will have failed to achieve one of our significant goals.

THE MARKET PRICE OF ETHANOL IS VOLATILE AND SUBJECT TO SIGNIFICANT
FLUCTUATIONS, WHICH MAY CAUSE OUR PROFITABILITY TO FLUCTUATE SIGNIFICANTLY.

The market price of ethanol is dependent on many factors, including on the
price of gasoline, which is in turn dependent on the price of petroleum.
Petroleum prices are highly volatile and difficult to forecast due to frequent
changes in global politics and the world economy. The distribution of petroleum
throughout the world is affected by incidents in unstable political
environments, such as Iraq, Iran, Kuwait, Saudi Arabia, the former U.S.S.R. and
other countries and regions. The industrialized world depends critically on oil
from these areas, and any disruption or other reduction in oil supply can cause
significant fluctuations in the prices of oil and gasoline. We cannot predict
the future price of oil or gasoline and may establish unprofitable prices for
the sale of ethanol due to significant fluctuations in market prices. For
example, the price of ethanol declined by approximately 25% from its 2004
average price per gallon in only five months from January 2005 through May 2005.
In recent years, the prices of gasoline, petroleum and ethanol have all reached
historically unprecedented high levels. If the prices of gasoline and petroleum
decline, we believe that the demand for and price of ethanol may be adversely
affected. Fluctuations in the market price of ethanol may cause our
profitability to fluctuate significantly.

We believe that the production of ethanol is expanding rapidly. There are a
number of new plants under construction and planned for construction, both
inside and outside California. We expect existing ethanol plants to expand by
increasing production capacity and actual production. Increases in the demand
for ethanol may not be commensurate with increasing supplies of ethanol. Thus,
increased production of ethanol may lead to lower ethanol prices. The increased
production of ethanol could also have other adverse effects. For example,
increased ethanol production could lead to increased supplies of co-products
from the production of ethanol, such as wet distillers grain, or WDG. Those
increased supplies could lead to lower prices for those co-products. Also, the
increased production of ethanol could result in increased demand for corn. This
could result in higher prices for corn and cause higher ethanol production costs
and, in the event that PEI California is unable to pass increases in the price
of corn to its customers, will result in lower profits. We cannot predict the
future price of ethanol or WDG. Any material decline in the price of ethanol or
WDG will adversely affect our sales and profitability.

THE CONSTRUCTION AND OPERATION OF OUR PLANNED ETHANOL PRODUCTION FACILITIES
MAY BE ADVERSELY AFFECTED BY ENVIRONMENTAL REGULATIONS AND PERMIT
REQUIREMENTS.

The production of ethanol involves the emission of various airborne
pollutants, including particulates, carbon monoxide, oxides of nitrogen and
volatile organic compounds. PEI California will be subject to extensive air,
water and other environmental regulations in connection with the construction
and operation of our planned ethanol production facilities. PEI California also

may be required to obtain various other water-related permits, such as a water
discharge permit and a storm-water discharge permit, a water withdrawal permit
and a public water supply permit. If for any reason PEI California is unable to
obtain any of the required permits, construction costs for our planned ethanol
production facilities are likely to increase; in addition, the facilities may
not be fully constructed at all. It is also likely that operations at the
facilities will be governed by the federal regulations of the Occupational
Safety and Health Administration, or OSHA, and other regulations. Compliance
with OSHA and other regulations may be time-consuming and expensive and may
delay or even prevent sales of ethanol in California or in other states.

VARIOUS RISKS ASSOCIATED WITH THE CONSTRUCTION OF OUR PLANNED ETHANOL
PRODUCTION FACILITIES MAY ADVERSELY AFFECT OUR SALES AND PROFITABILITY.

Delays in the construction of our planned ethanol production facilities or
defects in materials and/or workmanship may occur. Any defects could delay the
commencement of operations of the facilities, or, if such defects are discovered
after operations have commenced, could halt or discontinue operation of a
particular facility indefinitely. In addition, construction projects often
involve delays in obtaining permits and encounter delays due to weather
conditions, fire, the provision of materials or labor or other events. For
example, PEI California experienced a fire at its Madera County site during the
first quarter of 2004 which required repairs to areas and equipment damaged by
the fire. In addition, changes in interest rates or the credit environment or
changes in political administrations at the federal, state or local levels that
result in policy change towards ethanol or our project in particular, could
cause construction and operation delays. Any of these events may adversely
affect our sales and profitability.

PEI California may encounter hazardous conditions at or near each of its
planned facility sites, including the Madera County site that may delay or
prevent construction of a particular facility. If PEI California encounters a
hazardous condition at or near a site, work may be suspended and PEI California
may be required to correct the condition prior to continuing construction. The
presence of a hazardous condition would likely delay construction of a
particular facility and may require significant expenditure of resources to
correct the condition. For example, W. M. Lyles Co., the company we have
selected to construct our Madera County ethanol production facility, may be
entitled to an increase in its fees and afforded additional time for performance
if it has been adversely affected by the hazardous condition. If PEI California
encounters any hazardous condition during construction, our sales and
profitability may be adversely affected.

We have based our estimated capital resource needs on a design for our
first ethanol production facility in Madera County that we estimate will cost an
additional $60.0 million. The estimated cost of the facility is based on
preliminary discussions and estimates, but the final construction cost of the
facility may be significantly higher. Any significant increase in the final
construction cost of the facility will adversely affect our profitability,
liquidity and available capital resources.

OUR DEPENDENCE ON AND AGREEMENTS WITH W. M. LYLES CO. FOR THE CONSTRUCTION OF
OUR ETHANOL PRODUCTION FACILITY IN MADERA COUNTY COULD ADVERSELY AFFECT OUR
LIQUIDITY AND AVAILABLE CAPITAL RESOURCES, OUR SALES AND OUR PROFITABILITY.

We will be highly dependent upon W. M. Lyles Co. to design and build our
ethanol production facility in Madera County. Through Pacific Ethanol Madera,
LLC, or PEI Madera, a wholly-owned subsidiary, we have entered into agreements
with W. M. Lyles Co. for the construction of this facility. These agreements
contain a number of provisions that are favorable to W. M. Lyles Co. and
unfavorable to us. These agreements also include a provision that requires us to
pay a termination fee of $5.0 million to W. M. Lyles Co. in addition to payment
of all costs incurred by W. M. Lyles Co. for services rendered through the date
of termination, if we terminate W. M. Lyles Co. in favor of another contractor.

Consequently, if we terminate these agreements, the requirement that we pay the
termination fee and costs could adversely affect our liquidity and available
capital resources. In addition, if W. M. Lyles Co. has entered into or enters
into a construction contract with one or more other parties, it may be under
pressure to complete another project or projects and may prioritize the
completion of another project or projects ahead of our Madera County facility.
As a result, PEI California's ability to commence production of and sell ethanol
would be delayed, which would adversely affect our overall sales and
profitability. Also, through PEI California, we have entered into a letter
agreement with W. M. Lyles Co. that provides that, in the event that W. M. Lyles
Co. pays performance liquidated damages to PEI Madera as a result of a defect
attributable Delta-T Corporation, the engineer for the Madera County facility,
or in the event that W. M. Lyles Co. pays liquidated damages to PEI Madera under
our Phase 2 Design-Build Agreement as a result of a delay that is attributable
to Delta-T Corporation, then PEI California agrees to reimburse W. M. Lyles Co.
for such liquidated damages to the extent they exceed $2.0 million and up to a
maximum of $8.1 million. Reimbursements that PEI California is required to make
to W. M. Lyles Co. could adversely affect our liquidity and available capital
resources.

THE RAW MATERIALS AND ENERGY NECESSARY TO PRODUCE ETHANOL MAY BE UNAVAILABLE
OR MAY INCREASE IN PRICE, ADVERSELY AFFECTING OUR SALES AND PROFITABILITY.

The production of ethanol requires a significant amount of raw materials
and energy, primarily corn, water, electricity and natural gas. In particular,
we estimate that our Madera County ethanol production facility will require
approximately 12.5 million bushels or more of corn each year and significant and
uninterrupted supplies of water, electricity and natural gas. The prices of
corn, electricity and natural gas have fluctuated significantly in the past and
may fluctuate significantly in the future. In addition, droughts, severe winter
weather in the Midwest, where we expect to source corn, and other problems may
cause delays or interruptions of various durations in the delivery of corn to
California, reduce corn supplies and increase corn prices. Local water,
electricity and gas utilities may not be able to reliably supply the water,
electricity and natural gas that our Madera County facility will need or may not
be able to supply such resources on acceptable terms. In addition, if there is
an interruption in the supply of water or energy for any reason, we may be
required to halt ethanol production. We may not be able to successfully
anticipate or mitigate fluctuations in the prices of raw materials and energy
through the implementation of hedging and contracting techniques. PEI
California's hedging and contracting activities may not lower its prices of raw
materials and energy, and in a period of declining raw materials or energy
prices, these hedging and contracting strategies may result in PEI California
paying higher prices than its competitors. In addition, PEI California may be
unable to pass increases in the prices of raw materials and energy to its
customers. Higher raw materials and energy prices will generally cause lower
profit margins and may even result in losses. Accordingly, our sales and
profitability may be significantly and adversely affected by the prices and
supplies of raw materials and energy.

RISKS RELATED TO OUR COMMON STOCK

WE HAVE ENTERED INTO AN AGREEMENT FOR AN $84 MILLION INVESTMENT BY CASCADE
INVESTMENT, L.L.C. IF WE ARE UNABLE TO CLOSE THIS TRANSACTION, THE MARKET
PRICE OF OUR STOCK IS LIKELY TO DECLINE SIGNIFICANTLY AND INVESTORS
PURCHASING OUR STOCK COULD SUFFER SUBSTANTIAL LOSSES.

In November 2005, we entered into an agreement for an $84 million
investment by Cascade Investment, L.L.C., a widely-respected investment firm.
The closing of the transaction contemplated by this agreement is subject to
numerous conditions, including approval of the transaction by our stockholders
and the execution of suitable financing agreements with third parties for the
funding of the construction of our Madera County ethanol production facility. We
may be unable to satisfy all conditions to closing. If we are unable to close
this transaction, the market price of our stock is likely to decline
significantly and investors purchasing our stock could suffer substantial
losses.

OUR COMMON STOCK HAS A SMALL PUBLIC FLOAT AND SHARES OF OUR COMMON STOCK
ELIGIBLE FOR PUBLIC SALE COULD CAUSE THE MARKET PRICE OF OUR STOCK TO DROP,
EVEN IF OUR BUSINESS IS DOING WELL, AND MAKE IT DIFFICULT FOR US TO RAISE
ADDITIONAL CAPITAL THROUGH SALES OF EQUITY SECURITIES.

As of November 21, 2005, we had outstanding approximately 28.7 million
shares of our common stock. Approximately 25.3 million of these shares were
restricted under the Securities Act of 1933, including approximately 9.3 million
shares beneficially owned, in the aggregate, by our executive officers,
directors and 10% stockholders. Accordingly, our common stock has a public float
of approximately 3.4 million shares held by a relatively small number of public
investors.

We are in the process of registering for resale approximately 11.8 million
shares of our common stock, including shares of our common stock underlying
warrants. If and when a registration statement covering these shares of common
stock is declared effective, holders of these shares will be permitted, subject
to few limitations, to freely sell these shares of common stock. As a result of
our small public float, sales of substantial amounts of common stock, including
shares issued upon the exercise of stock options or warrants, or an anticipation
that such sales could occur, may materially and adversely affect prevailing
market prices for our common stock. Any adverse effect on the market price of
our common stock could make it difficult for us to raise additional capital
through sales of equity securities at a time and at a price that we deem
appropriate.

OUR STOCK PRICE IS HIGHLY VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES
FOR INVESTORS PURCHASING SHARES OF OUR COMMON STOCK AND IN LITIGATION AGAINST
US.

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

o the volume and timing of the receipt of orders for ethanol from major
customers;
o competitive pricing pressures;
o our ability to produce, sell and deliver ethanol on a cost-effective
and timely basis;
o our inability to obtain construction, acquisition, capital equipment
and/or working capital financing;
o the introduction and announcement of one or more new alternatives to
ethanol by our competitors;
o changing conditions in the ethanol and fuel markets;
o changes in market valuations of similar companies;
o stock market price and volume fluctuations generally;
o regulatory developments or increased enforcement;
o fluctuations in our quarterly or annual operating results;
o additions or departures of key personnel; and
o future sales of our common stock or other securities.

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

The price at which you purchase shares of our common stock may not be
indicative of the price that will prevail in the trading market. You may be
unable to sell your shares of common stock at or above your purchase price,
which may result in substantial losses to you and which may include the complete
loss of your investment. In the past, securities class action litigation has
often been brought against a company following periods of stock price
volatility. We may be the target of similar litigation in the future. Securities
litigation could result in substantial costs and divert management's attention
and our resources away from our business. Any of the risks described above could
adversely affect our sales and profitability and also the price of our common
stock.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements, including statements
concerning future conditions in the electronic components and communications
equipment industries, and concerning our future business, financial condition,
operating strategies, and operational and legal risks. We use words like
"believe," "expect," "may," "will," "could," "seek," "estimate," "continue,"
"anticipate," "intend," "goal," "future," "plan" or variations of those terms
and other similar expressions, including their use in the negative, to identify
forward-looking statements. You should not place undue reliance on these
forward-looking statements, which speak only as to our expectations as of the
date of this prospectus. These forward-looking statements are subject to a
number of risks and uncertainties, including those identified under "Risk
Factors" and elsewhere in this prospectus. Although we believe that the
expectations reflected in these forward-looking statements are reasonable,
actual conditions in the ethanol production and distribution industries, and
actual conditions and results in our business, could differ materially from
those expressed in these forward-looking statements. In addition, none of the
events anticipated in the forward-looking statements may actually occur. Any of
these different outcomes could cause the price of our common stock to decline
substantially. Except as required by law, we undertake no duty to update any
forward-looking statement after the date of this prospectus, either to conform
any statement to reflect actual results or to reflect the occurrence of
unanticipated events.

USE OF PROCEEDS

We will not receive any of the proceeds from the sale of shares of our
common stock in this offering. Rather, all proceeds will be received by selling
security holders. Ryan W. Turner, our Chief Operating Officer and Secretary, is
a named co-beneficiary of the Turner Family Trust dated February 18, 2004, one
of the selling security holders.

Upon exercise of all warrants, the underlying shares of common stock of
which are offered for sale hereunder, we expect to receive an aggregate of
approximately $10.0 million. We expect to use any cash proceeds from the
exercise of warrants for general working capital purposes.

DIVIDEND POLICY

We have not declared or paid any cash dividends on our capital stock in the
past, and we do not anticipate declaring or paying cash dividends on our common
stock in the foreseeable future.

We will pay dividends on our common stock only if and when declared by our
board of directors. Our board of directors' ability to declare a dividend is
subject to restrictions imposed by Delaware law. In determining whether to
declare dividends, the board of directors will consider these restrictions as
well as our financial condition, results of operations, working capital
requirements, future prospects and other factors it considers relevant.

PRICE RANGE OF COMMON STOCK

Our common stock has been traded on the Nasdaq National Market under the
symbol "PEIX" since October 10, 2005. Prior to October 10, 2005 and since March
24, 2005, our common stock traded on the Nasdaq Capital Market (formerly, the
Nasdaq SmallCap Market) under the symbol "PEIX." Prior to March 24, 2005, our
common stock traded on the Nasdaq SmallCap Market under the symbol "ACTY." The
table below shows, for each fiscal quarter indicated, the high and low closing
prices for shares of our common stock. This information has been obtained from
The Nasdaq Stock Market. The prices shown reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not necessarily represent
actual transactions.

HIGH LOW
------ ------
YEAR ENDED DECEMBER 31, 2003
First Quarter....................................... $ 5.05 $ 1.35
Second Quarter...................................... 2.80 1.80
Third Quarter....................................... 2.90 1.75
Fourth Quarter...................................... 3.90 2.35
YEAR ENDED DECEMBER 31, 2004
First Quarter....................................... $ 2.61 $ 1.70
Second Quarter...................................... 6.09 1.62
Third Quarter....................................... 5.71 4.50
Fourth Quarter...................................... 6.75 4.48
YEAR ENDING DECEMBER 31, 2005
First Quarter....................................... $10.25 $ 5.49
Second Quarter...................................... 12.94 8.58
Third Quarter....................................... 11.20 7.78
Fourth Quarter (through November 21, 2005).......... 13.12 7.71

As of November 21, 2005, we had 28,667,185 shares of common stock
outstanding held of record by approximately 500 stockholders. These holders of
record include depositories that hold shares of stock for brokerage firms which,
in turn, hold shares of stock for numerous beneficial owners. On November 21,
2005, the closing sale price of our common stock on the Nasdaq National Market
was $13.12 per share.

CAPITALIZATION

The following table sets forth our capitalization as of September 30, 2005.
The information in the table below should be read in conjunction with our
consolidated financial statements and related notes beginning on page F-1 of
this prospectus.

SEPTEMBER 30,
2005
------------

Long-term debt, less current portion ............................ $ 2,948,081
------------
Stockholders' equity:
Preferred Stock, $0.001 par value per share, 10,000,000 shares
authorized; no shares issued and outstanding ............... --
Common Stock, $0.001 par value, 100,000,000 shares authorized;
28,667,185 shares issued and outstanding ................... 28,667
Additional paid-in capital ................................... 42,374,060
Unvested consulting expense .................................. (1,583,739)
Due from stockholders ........................................ (600)
Accumulated deficit .......................................... (8,467,591)
------------
Total stockholders' equity ................................ 32,350,797
------------
Total capitalization ................................... $ 35,298,878
============

SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA

The following financial data should be read in conjunction with the
consolidated financial statements and the notes to those statements beginning on
page F-1 of this prospectus, and the section entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this prospectus. The consolidated statements of operations data for
the nine months ended September 30, 2005 and 2004 and the consolidated balance
sheet data as of September 30, 2005 and 2004 are derived from unaudited
financial statements included in this prospectus that, in the opinion of our
management, reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial data for these periods.

NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
---------------------------- ----------------------------
2005 2004 2004 2003
------------ ------------ ------------ ------------

CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales ................................................ $ 51,530,735 $ 16,832 $ 19,764 $ 1,016,594
Cost of goods sold ....................................... 49,695,870 10,789 12,523 946,012
------------ ------------ ------------ ------------
Gross profit ............................................. 1,834,865 6,043 7,241 70,582
Selling, general and administrative expenses ............. 3,999,653 714,730 1,070,010 647,731
Services rendered in connection with feasibility study ... 852,250 -- -- --
Non-cash compensation for consulting fees ................ 1,749,967 862,500 1,207,500 --
------------ ------------ ------------ ------------
Loss from operations ..................................... (4,767,005) (1,571,187) (2,270,269) (577,149)
Total other expense ...................................... (33,740) (413,358) (530,698) (279,930)
------------ ------------ ------------ ------------
Loss from operations before income taxes ................. (4,800,745) (1,984,545) (2,800,967) (857,079)
Provision for income taxes ............................... 5,600 8,400 1,600 1,600
------------ ------------ ------------ ------------
Net loss ................................................. $ (4,806,345) $ (1,992,945) $ (2,802,567) $ (858,679)
============ ============ ============ ============
Loss per share, basic and diluted ........................ $ (0.20) $ (0.17) $ (0.23) $ (0.09)
============ ============ ============ ============
Weighted-average shares outstanding, basic and diluted ... 23,841,380 12,064,684 12,396,895 9,578,866
============ ============ ============ ============
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents ................................ $ 11,344,034 $ 220,908 $ 42 $ 249,084
Working capital (deficit) ................................ 11,306,924 (558,005) (1,024,747) (357,576)
Total assets ............................................. 40,344,874 7,502,714 7,179,263 6,559,634
Stockholders' equity ..................................... 32,350,797 1,841,830 1,355,732 1,367,828

No cash dividends on our common stock were declared during any of the
periods presented above.

Various factors materially affect the comparability of the information
presented in the above table. These factors relate primarily to a Share Exchange
Transaction that was consummated on March 23, 2005 with the shareholders of PEI
California and the holders of the membership interests of each of Kinergy and
ReEnergy pursuant to which we acquired all of the issued and outstanding capital
stock of PEI California and all of the outstanding membership interests of
Kinergy and ReEnergy. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Overview."

UNAUDITED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL DATA

The following tables present our unaudited condensed consolidated pro forma
financial data for the nine months ended September 30, 2005 and for the year
ended December 31, 2004. You should read this financial data together with
"Unaudited Condensed Consolidated Pro Forma Financial Data," "Selected
Historical Consolidated Financial Data," "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and our historical audited
and unaudited consolidated financial statements and the related notes thereto
and the historical audited financial statements of Kinergy and ReEnergy
appearing elsewhere in this prospectus.

On March 23, 2005, we completed a Share Exchange Transaction with the
shareholders of PEI California and the holders of the membership interests of
each of Kinergy and ReEnergy, pursuant to which we acquired all of the issued
and outstanding capital stock of PEI California and all of the outstanding
membership interests of Kinergy and ReEnergy. This transaction has been
accounted for as a reverse acquisition whereby PEI California is the accounting
acquiror. Accordingly, the unaudited condensed consolidated statements of
operations data for the year ended December 31, 2004 give effect to the
acquisition by PEI California of Accessity, Kinergy and ReEnergy as if the
acquisitions had been consummated on January 1, 2004. Pro forma condensed
consolidated balance sheet data is not presented because the balance sheets of
Accessity, Kinergy and ReEnergy and related purchase accounting adjustments are
consolidated and included in the financial statements included in our quarterly
report on Form 10-QSB for the quarterly period ended September 30, 2005 filed
with the Securities and Exchange Commission on August 15, 2005. Pro forma
adjustments for Accessity Corp. are not included because they would have no
material impact on the pro forma financial information presented.

The financial information for Pacific Ethanol contained on the Pro Forma
Condensed Consolidated Statements of Operations for the Nine Months ended
September 30, 2005 set forth below is comprised of financial information for
Kinergy and ReEnergy for the period beginning on March 24, 2005 and ending on
September 30, 2005 and financial information for PEI California for the period
beginning on January 1, 2005 and ending on September 30, 2005.

The acquisition was accounted for under the purchase method of accounting
in accordance with accounting principles generally accepted in the United
States. Under this method, tangible and identifiable intangible assets acquired
and liabilities assumed are recorded at their fair values based on the valuation
by an independent valuation firm and its determination of the excess
consideration given allocated between the identifiable intangible assets and
goodwill. The excess of the purchase price, plus estimated fees and expenses
related to the acquisitions, over the fair value of net assets acquired are
recorded as goodwill.

PACIFIC ETHANOL, INC., REENERGY, LLC AND KINERGY MARKETING, LLC
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2005

PACIFIC PRO FORMA PRO FORMA
REENERGY KINERGY ETHANOL ADJUSTMENTS COMBINED (1)
------------ ------------ ------------ ------------ ------------

CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales ............................................ $ -- $ 23,605,252 $ 51,530,735 $ -- $ 75,135,987
Cost of goods sold ................................... -- 23,207,602 49,695,870 -- 72,903,472
------------ ------------ ------------ ------------ ------------
Gross profit ......................................... -- 397,650 1,834,865 -- 2,232,515
Selling, general and administrative expenses ......... 346 72,240 3,999,653 251,072 4,323,311
Services rendered in connection with feasibility study -- -- 852,250 -- 852,250
Non-cash compensation and consulting fees ............ -- -- 1,749,967 246,864 1,996,831
------------ ------------ ------------ ------------ ------------
Net income (loss) from operations .................... (346) 325,410 (4,767,005) (497,936) (4,939,877)
Total other income (expense) ......................... -- 616 (33,740) -- (33,124)
------------ ------------ ------------ ------------ ------------
Net income (loss) from operations before income taxes (346) 326,026 (4,800,745) (497,936) (4,973,001)
Provision for income taxes ........................... 800 -- 5,600 -- 6,400
------------ ------------ ------------ ------------ ------------
Net income (loss) .................................... $ (1,146) $ 326,026 $ (4,806,345) $ (497,936) $ (4,979,401)
============ ============ ============ ============ ============

Loss per share, basic and diluted (2) ................ $ (0.20) $ (0.18)
============ ============
Weighted-average shares outstanding, basic and diluted 23,841,380 28,021,756
============ ============

--------------
(1) For an explanation of the pro forma adjustments see Notes to Unaudited Pro Forma Combined Consolidated Statements of
Operations for the Nine Months Ended September 30, 2005 on page F-63.
(2) The following table summarizes the combined pro forma basic and diluted loss per share as if the acquisitions had occurred as
of January 1, 2005:

PACIFIC PRO FORMA PRO FORMA
REENERGY KINERGY ETHANOL ADJUSTMENTS COMBINED (a)
----------- ----------- ----------- ----------- -----------
Loss per share ............................................. $ -- $ -- $ (0.20) $ -- $ (0.18)
----------- ----------- ----------- ----------- -----------
Numerator:

Net income (loss) attributable to common stockholders . (1,146) 326,026 (4,806,345) (497,936) (4,979,401)
----------- ----------- ----------- ----------- -----------
Denominator:

Weighted average number of common shares
outstanding during the period, basic .................. -- -- 23,841,380 2,103,453 25,944,833
Additional weighted average common shares
if private placement occurred at January 1,
2005 (considered necessary to complete acquisitions) .. -- -- -- 2,076,923 2,076,923
=========== =========== =========== =========== ===========
Adjusted weighted average shares ........................... -- -- 23,841,380 4,180,376 28,021,756
=========== =========== =========== =========== ===========
Basic and diluted loss per share ........................... $ -- $ -- $ (0.20) $ (0.12) $ (0.18)
=========== =========== =========== =========== ===========

----------
(a) For an explanation of the pro forma adjustments see Notes to Unaudited Pro Forma Combined Consolidated Statements of
Operations for the Nine Months Ended September 30, 2005 on page F-63.

PACIFIC ETHANOL CALIFORNIA, INC., REENERGY, LLC AND
KINERGY MARKETING, LLC
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 2004

PEI PRO FORMA PRO FORMA
REENERGY KINERGY CALIFORNIA ADJUSTMENTS COMBINED (1)
------------ ------------ ------------ ------------ ------------

CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales .............................................. $ -- $ 82,790,404 $ 19,764 $ -- $ 82,810,168
Cost of goods sold ..................................... -- 79,580,897 12,523 -- 79,593,420
------------ ------------ ------------ ------------ ------------
Gross profit ........................................... -- 3,209,507 7,241 -- 3,216,748
Selling, general and administrative expenses ........... 9,854 275,588 1,070,010 1,331,000 2,686,452
Services rendered in connection with feasibility study . -- -- -- 852,250 852,250
Non-cash compensation and consulting fees .............. -- -- 1,207,500 1,474,250 2,681,750
------------ ------------ ------------ ------------ ------------
Net income (loss) from operations ...................... (9,854) 2,933,919 (2,270,269) (3,657,500) (3,003,704)
Total other expense .................................... -- (4,837) (530,698) -- (535,535)
------------ ------------ ------------ ------------ ------------
Net income (loss) from operations before income taxes .. (9,854) 2,929,082 (2,800,967) (3,657,500) (3,539,239)
Provision for income taxes ............................. 800 -- 1,600 -- 2,400
------------ ------------ ------------ ------------ ------------
Net income (loss) ...................................... $ (10,654) $ 2,929,082 $ (2,802,567) $ (3,657,500) $ (3,541,639)
============ ============ ============ ============ ============
Loss per share, basic and diluted (2) .................. $ (0.23) $ (0.13)
============ ============
Weighted-average shares outstanding, basic and diluted . 12,396,895 26,486,309
============ ============

----------

(1) For an explanation of the pro forma adjustments see Notes to Unaudited Pro Forma Combined Consolidated Statements of
Operations for the Year Ended December 31, 2004 on page F-65.

(2) The following table summarizes the combined pro forma basic and diluted loss per share as if the acquisitions had occurred as
of January 1, 2004:

PEI PRO FORMA PRO FORMA
REENERGY KINERGY CALIFORNIA ADJUSTMENTS COMBINED (a)
----------- ----------- ----------- ----------- -----------
Loss per share ........................................... $ -- $ -- $ (0.23) $ -- $ (0.13)
----------- ----------- ----------- ----------- -----------
Numerator:

Net income (loss) attributable to common stockholders (10,654) 2,929,082 (2,802,567) (3,657,500) (3,541,639)
----------- ----------- ----------- ----------- -----------
Denominator:

Weighted average number of common shares outstanding
during the period, basic ............................ 12,396,895 7,089,414 19,486,309
Additional weighted average common shares if private
placement occurred at January 1, 2004 (considered
necessary to complete acquisitions) ................. -- 7,000,000 7,000,000
----------- ----------- -----------
Adjusted weighted average shares ......................... 12,396,895 14,089,414 26,486,309
----------- ----------- -----------
Basic and diluted loss per share ......................... $ (0.23) $ (0.26) $ (0.13)
=========== =========== ===========

------------

(a) For an explanation of the pro forma adjustments see Notes to Unaudited Pro Forma Combined Consolidated Statements of
Operations for the Year Ended December 31, 2005 on page F-65.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with
our condensed consolidated financial statements and notes to financial
statements included elsewhere in this prospectus. This prospectus and our
condensed consolidated financial statements and notes to financial statements
contain forward-looking statements, which generally include the plans and
objectives of management for future operations, including plans and objectives
relating to our future economic performance and our current beliefs regarding
revenues we might generate and profits we might earn if we are successful in
implementing our business strategies. The forward-looking statements and
associated risks may include, relate to or be qualified by other important
factors, including, without limitation:

o the projected growth or contraction in the ethanol market in which we
operate;
o fluctuations in the market price of ethanol;
o our business strategy for expanding, maintaining or contracting our
presence in this market;
o our ability to obtain the necessary financing to complete construction
of our planned ethanol production facilities, including our facility
in Madera County, California;
o anticipated trends in our financial condition and results of
operations; and
o our ability to distinguish ourselves from our current and future
competitors.

We do not undertake to update, revise or correct any forward-looking
statements.

Any of the factors described above or in the "Risk Factors" section could
cause our financial results, including our net income or loss or growth in net
income or loss to differ materially from prior results, which in turn could,
among other things, cause the price of our common stock to fluctuate
substantially.

OVERVIEW

Our primary goal is to become a leader in the production, marketing and
sale of ethanol and other renewable fuels in the Western United States.

Through our wholly-owned subsidiary, Kinergy Marketing, LLC, or Kinergy, we
are currently engaged in the business of marketing ethanol in the Western United
States. We provide transportation, storage and delivery of ethanol through
third-party service providers. We sell ethanol primarily in California, Nevada,
Arizona and Oregon and have extensive customer relationships throughout the
Western United States and extensive supplier relationships throughout the
Western and Midwestern United States. We do not currently produce any ethanol
that we sell. Until we commence the production of ethanol, if at all, we expect
our operations to consist primarily of the marketing and sale of ethanol
produced by third-parties. Accordingly, we expect that unless and until we
complete the construction of our initial ethanol production facility in Madera
County our consolidated net sales will consist solely of net sales generated by
Kinergy. We anticipate that our net sales will grow in the long-term as demand
for ethanol increases and as a result of our marketing agreements with
third-party ethanol producers.

Through our wholly-owned subsidiary, Pacific Ethanol California, Inc., or
PEI California, we are constructing an ethanol production facility in Madera
County to begin the production and sale of ethanol and its co-products if we are
able to secure all the necessary financing to complete construction of this
facility. To date, we have not obtained all of this financing. See "Risk Factors
- Risks Relating to the Business of PEI California." We also intend to construct
or otherwise acquire additional ethanol production facilities as financing
resources and business prospects make the construction or acquisition of these
facilities advisable. PEI California has, to date, not conducted any significant
business operations other than the acquisition of real property located in
Madera County, on which we are constructing our first ethanol production
facility.

Currently, ethanol represents only up to 3% of the total annual gasoline
supply in the United States. We believe that the ethanol industry has
substantial room to grow to reach what we estimate is an achievable level of at
least 10% of the total annual gasoline supply in the United States. An increase
in the demand for ethanol from California's current level of 5.7% to at least
10% of total annual gasoline supply would result in demand for approximately 700
million additional gallons of ethanol, representing an increase in annual demand
in California of approximately 75%. An additional 700 million gallons of ethanol
would represent an increase in annual demand of approximately 18% for the entire
United States.

Kinergy has two principal methods of conducting its ethanol marketing and
sales activities: direct sales and inventory sales. Kinergy's first method of
marketing and selling ethanol involves direct sales through which suppliers
deliver ethanol directly via rail to Kinergy's customers. For direct sales,
Kinergy typically matches ethanol purchase and sale contracts of like quantities
and delivery periods. These back-to-back direct sales typically involve no price
risks to Kinergy that otherwise may result from fluctuations in the market price
of ethanol. Kinergy's second method of marketing and selling ethanol involves
truck deliveries from inventory purchased by Kinergy in advance. For inventory
sales, as with direct sales, Kinergy typically matches ethanol purchase and sale
contracts of like quantities. However, timing differences do exist and
consequently, a back-to-back inventory sale may lag by up to two or more weeks.
This time lag results from inventory transit and turnover times. As a result,
Kinergy may supply ethanol under new inventory sales contracts from existing
inventory. These back-to-back inventory sales therefore involve some price risks
to Kinergy resulting from potential fluctuations in the market price of ethanol.

We believe that the only consistent price risk to Kinergy is currently
inventory risk. Management seeks to optimize transitions to new inventory sales
contracts and reduce the effects of declining ethanol prices by managing
inventory as carefully as possible to decrease inventory levels in anticipation
of declining ethanol prices. In addition, management seeks to increase inventory
levels in anticipation of rising ethanol prices. Because Kinergy increases
inventory levels in anticipation of rising ethanol prices and decreases
inventory levels in anticipation of declining ethanol prices, it is subject to
the risk of ethanol prices moving in unanticipated directions, which could
result in declining or even negative gross profit margins over certain periods
of time, but also enables Kinergy to potentially benefit from above-normal gross
profit margins.

Over the past few years, the market price of ethanol has experienced
significant fluctuations. More recently, the price of ethanol declined by
approximately 25% from its 2004 average price per gallon in five months from
January 2005 through May 2005 and reversed this decline and increased to
approximately 55% above its 2004 average price per gallon in four months from
June 2005 through September 2005. Since September 2005, the price of ethanol has
generally trended downward and the average price of ethanol during October 2005

and through mid-November 2005 was approximately 24% above its 2004 average price
per gallon. We believe that the market price of ethanol will, for the
foreseeable future, continue to experience significant fluctuations which may
cause our future results of operations to fluctuate significantly. As a result,
our historical results of operations may not be predictive of our future results
of operations.

Historically, Kinergy's gross profit margins have averaged between 2.0% and
4.4%. Kinergy's gross profit margin in 2004 was 3.9%. We believe that Kinergy's
future gross profit margins will be lower than historical levels for two
principal reasons. First, higher ethanol sales volumes and increased competition
in the ethanol market have reduced margins, and we believe will continue to
reduce margins, as compared to historical levels. Second, Kinergy is emphasizing
direct sales to a greater degree. Direct sales ordinarily have gross profit
margins of approximately 1.0% over periods of one year or more, a level that is
consistent with our recent ethanol marketing agreements with Front Range Energy,
LLC and Phoenix Bio-Industries, LLC, and, we believe, with the ethanol marketing
industry as a whole. Inventory sales ordinarily have base gross profit margins
of approximately 1.0% to 2.0%, assuming stability in the price of ethanol, over
periods of one year or more. We believe that, for our inventory sales, gross
profit margins above or below this range likely result from fluctuations in the
market price of ethanol. Historically, Kinergy's sales were comprised to a
greater degree of inventory sales that often involved the buying and selling of
ethanol based on anticipated trends in the market price of ethanol. These
inventory sales represented higher-risk positions but enabled Kinergy to achieve
higher margin levels, as compared to direct sales, as a result of correctly
anticipating fluctuations in the market price of ethanol. As a result of
highly-volatile ethanol prices, we are unable to estimate Kinergy's future gross
profit margins from inventory sales. However, we believe that over longer
periods of up to a year or more, our gross profit margin from inventory sales is
unlikely to exceed our historic high average gross profit margin of 4.4%.

If we are able to complete our ethanol production facility in Madera County
and commence producing ethanol, we expect our gross profit margins for ethanol
that we produce to be substantially higher than our gross profit margins for
Kinergy's direct sales and inventory sales activities. However, any gross
profits that we realize from the production of ethanol will be highly dependent
upon the prevailing market price of ethanol at the time of sale. Moreover, in
light of the recent and expected future volatility in the price of ethanol, we
are now, and expect for the foreseeable future to be, unable to estimate our
gross profit margins resulting from the sale of ethanol that we may produce.

Kinergy's gross profit margin declined by 56% from 3.9% in 2004 to 1.7% in
the first quarter of 2005, declined further by 82% from 3.9% in 2004 to 0.7% in
the second quarter of 2005 and increased by 59% from 3.9% in 2004 to 6.2% in the
third quarter of 2005. Kinergy's gross profit margin for the full nine months
ended September 30, 2005 declined by 8% from 3.9% in 2004 to 3.6%. Kinergy's
gross profit margin in the first quarter of 2005 is generally reflective of the
contracted margins for that period. The decline in Kinergy's gross profit margin
in the second quarter of 2005 resulted primarily from the transition from
inventory sales contracts ending in the first quarter of 2005 to new inventory
sales contracts beginning in the second quarter of 2005 during a period of
rapidly declining market prices. As discussed above, because of the time lag in
delivering ethanol under new inventory sales contracts, Kinergy sold ethanol
under these contracts from existing inventory that was purchased at levels
higher than the prevailing market price at the time of sale. The increase in
Kinergy's gross profit margin in the third quarter of 2005 is generally
reflective of opportunistic buying and selling during a period of rapidly
increasing market prices. As noted above, the price of ethanol declined during
the first and second quarters of 2005 by approximately 25% from its 2004 average
price per gallon in five months from January 2005 through May 2005 and reversed
this decline and increased during the third quarter of 2005 to approximately 55%
above its 2004 average price per gallon in four months from June 2005 through
September 2005. Since September 2005, the price of ethanol has generally trended
downward and the average price of ethanol during October 2005 and through
mid-November 2005 was approximately 24% above its 2004 average price per gallon.

Management correctly anticipated a softening in the price ethanol in early
2005, but neither management nor, we believe, the ethanol industry as a whole,
anticipated the speed and the extent of the decline in the price of ethanol from
January 2005 through May 2005. As a result, Kinergy was forced to sell some
ethanol at negative gross profit levels following the rapid and extensive
decline in the price of ethanol. In the second quarter of 2005, and before
ethanol prices increased to levels significantly higher than their recent lows,
Kinergy sold much of this ethanol inventory that was acquired at prices higher
than those prevailing at the time of sale. Accordingly, despite the general
increase in ethanol prices during the second quarter of 2005, this inventory and
these sales still had the effect of depressing Kinergy's gross profit margin to
0.7% for the entire second quarter of 2005 and to 0.8% for the six months ended
June 30, 2005. However, as a result of the substantial increase in the price of
ethanol during the third quarter of 2005, and the opportunistic buying and
selling of ethanol during that period, Kinergy's gross profit margin increased
to 6.2% for the third quarter of 2005, a level significantly higher than our
gross profit margins for either the first or second quarters of 2005. As noted
above, our results in the third quarter of 2005 raised Kinergy's gross profit
margin to 3.6% for the nine months ended September 30, 2005.

Management decided to maintain net long ethanol positions in the first and
second quarters of 2005 as a result of a confluence of factors, including its
expectation of increased prices of gasoline and petroleum and anticipated
favorable federal legislation that we expected would increase the demand for and
price of ethanol over the short- and longer-terms. We believe that these factors
were, however, outweighed by a sudden but short-lived excess of ethanol supplied
to the market by a number of new ethanol production facilities. We believe that
the sudden and short-lived excess of ethanol supplied to the market coupled with
higher market-wide inventory levels caused the rapid and steep decline in the
price of ethanol. Following its rapid decline during January 2005 through May
2005, the price of ethanol reversed and subsequently increased to unprecedented
high levels from June 2005 through September 2005. We believe that this increase
in the price of ethanol demonstrates that the fundamental factors considered by
management in deciding to maintain net long ethanol positions ultimately were
the prevailing forces in driving the price of ethanol to unprecedented high
levels. In addition, we believe that these factors contributed and will continue
to contribute to the market's relatively quick absorption of the additional
supply of ethanol that was, and that continues to be, supplied to the market by
new ethanol production facilities.

SHARE EXCHANGE TRANSACTION

On March 23, 2005, we completed a share exchange transaction, or the Share
Exchange Transaction, with the shareholders of PEI California, and the holders
of the membership interests of each of Kinergy and ReEnergy, pursuant to which
we acquired all of the issued and outstanding shares of capital stock of PEI
California and all of the outstanding membership interests of each of Kinergy
and ReEnergy. Immediately prior to the consummation of the share exchange, our
predecessor, Accessity, reincorporated in the State of Delaware under the name
"Pacific Ethanol, Inc." through a merger of Accessity with and into its
then-wholly-owned Delaware subsidiary named Pacific Ethanol, Inc., which was
formed for the purpose of effecting the reincorporation. We are the surviving
entity resulting from the reincorporation merger and have three principal
wholly-owned subsidiaries: Kinergy, PEI California and ReEnergy.

California were, following the consummation of the Share Exchange Transaction,
deemed to hold warrants to acquire an equal number of our shares of common
stock. Also, a holder of a promissory note convertible into an aggregate of
664,879 shares of common stock of PEI California was, following the consummation
of the Share Exchange Transaction, entitled to convert the note into an equal
number of shares of our common stock.

The Share Exchange Transaction has been accounted for as a reverse
acquisition whereby PEI California is deemed to be the accounting acquiror. As a
result, our results of operations for the nine months ended September 30, 2004
and the fiscal years 2004 and 2003 consist of the operations of PEI California
only. We have consolidated the results of PEI California, Kinergy and ReEnergy
beginning March 23, 2005, the date of the Share Exchange Transaction.
Accordingly, our results of operations for the nine months ended September 30,
2005 consist of the operations of PEI California for the entire nine month
period and our operations and the operations of Kinergy and ReEnergy from March
23, 2005 through September 30, 2005.

PEI California has, to date, not conducted any significant business
operations other than the acquisition of real property located in Madera County
on which we are constructing our first ethanol production facility. ReEnergy
does not presently have any significant business operations or plans but does
hold an option to acquire real property in Visalia, California, on which we
intend to build an ethanol production facility.

We have consolidated the results of operations of Kinergy beginning from
March 23, 2005, the date of the closing of the Share Exchange Transaction. We
expect that, until we complete construction of our ethanol production facility
in Madera County, our operations will consist solely of operations conducted by
Kinergy.

The following table summarizes the unaudited assets acquired and
liabilities assumed in connection with the Share Exchange Transaction (as
restated):

Current assets $ 7,014,196
Property, plant and equipment 6,224
Intangibles, including goodwill 10,935,750
-----------
Total assets acquired 17,956,170
Current liabilities 4,253,177
Other liabilities 83,017
-----------
Total liabilities assumed 4,336,194
-----------
Net assets acquired $13,619,976
===========
Shares of common stock issued 6,489,414
===========

The purchase price represented a significant premium over the recorded net
worth of the acquired entities' assets. In deciding to pay this premium, we
considered various factors, including the value of Kinergy's trade name,
Kinergy's extensive market presence and history, Kinergy's industry knowledge
and expertise, Kinergy's extensive customer relationships and expected synergies
with Kinergy's business and assets and our planned entry into the ethanol
production business.

The following table summarizes, on an unaudited pro forma basis, our
combined results of operations, as though the acquisitions occurred as of
January 1, 2004. The pro forma amounts give effect to appropriate adjustments
for amortization of intangibles and income taxes. The pro forma amounts
presented are not necessarily indicative of future operating results.

Nine Months
Ended September 30,
----------------------------
2005 2004
------------ ------------

Net sales $ 75,135,987 $ 56,545,947
============ ============
Net loss $ (4,979,401) $ (3,273,338)
============ ============
Loss per share of common stock
Basic and diluted $ (0.18) $ (0.13)
============ ============

Prior to the Share Exchange Transaction, through its wholly-owned
subsidiary Sentaur Corp., Accessity was in the business of providing medical
billing recovery services for hospitals. Sentaur Corp.'s services were designed
to help hospitals recoup discounts improperly taken by insurance companies and
other institutional payors of medical treatments. In addition, through its
wholly-owned subsidiary DriverShield CRM Corp., Accessity was in the business of
providing internet-based vehicle repair management services, including collision
and general repair programs, estimating and auditing services and vehicle
rentals for insurance companies and affinity group members.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of net sales and expenses for
each period. The following represents a summary of our critical accounting
policies, defined as those policies that we believe are the most important to
the portrayal of our financial condition and results of operations and that
require management's most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effects of matters that are
inherently uncertain.

REVENUE RECOGNITION

We recognize revenue in accordance with SEC Staff Accounting Bulletin No.
104, Revenue Recognition, and the related Emerging Task Force Issue No. EITF
99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent, or EITF
99-19.

We derive revenue primarily from sales of ethanol. Our sales are based upon
written agreements or purchase orders that identify the amount of ethanol to be
purchased and the purchase price. Revenue is recognized, gross, upon delivery of
ethanol to a customer's designated ethanol tank. Shipments are made to
customers, variously, directly from suppliers and from our inventory to our
customers by truck or rail. Ethanol that is shipped by rail originates primarily
in the Midwest and takes from 10 to 14 days from date of shipment to be
delivered to the customer or to one of four terminals in California and Oregon.
For local deliveries the product is shipped by truck and delivered the same day
as shipment

In accordance with the criteria outlined in EITF 99-19, we record ethanol
sales revenue at gross. We generally take title to the ethanol, have the
contractual obligation to deliver ethanol that meets certain specifications
(hence to determine the nature, type, characteristics, or specifications of the
product or services ordered by the customer), negotiate the price of the
ethanol, are responsible for assuring fulfillment of the amount to be delivered,
select the supplier and make the decision as to which available inventory is
matched to which sales fulfillment (not always the same customer) and assume
credit risk for the amount billed to the customer. The presence of the
combination of these factors indicates that we have the risks and rewards of a
principal in these transactions and therefore we record revenue at the gross
amount.

INVENTORY

Inventory consists of fuel ethanol and is valued at the lower of cost or
market, cost being determined on a first-in first-out basis. Shipping, handling
and storage costs are classified as a component of cost of goods sold. Title to
ethanol transfers from the producer to us when the ethanol passes through the
inlet flange of our receiving tank.

INTANGIBLES, INCLUDING GOODWILL

We periodically evaluate our intangibles, including goodwill, for potential
impairment. Our judgments regarding the existence of impairment are based on
legal factors, market conditions and operational performance of our acquired
businesses.

In assessing potential impairment of goodwill, we consider these factors
and forecast financial performance of the acquired businesses. If forecasts are
not met, we may have to record additional impairment charges not previously
recognized. In assessing the recoverability of our goodwill and other
intangibles, we must make assumptions regarding estimated future cash flows and
other factors to determine the fair value of those respective assets. If these
estimates or their related assumptions change in the future, we may be required
to record impairment charges for these assets that were not previously recorded.
If that were the case, we would have to record an expense in order to reduce the
carrying value of our goodwill.

In connection with the Share Exchange Transaction and our acquisition of
Kinergy and ReEnergy, we engaged a valuation firm to determine what portion of
the purchase price should be allocated to identifiable intangible assets.
Through that process, we have estimated that for Kinergy, the distribution
backlog is valued at $136,000, the customer relationships are valued at
$5,600,000 and the trade name is valued at $3,100,000. We issued stock valued at
$9,803,750 for the acquisition of Kinergy. In addition, certain stockholders
sold stock to the sole member of Kinergy and a related party, increasing the
purchase price by $1,012,000. The purchase price for Kinergy totaled
$10,815,750. Goodwill directly associated with the Kinergy acquisition therefore
totaled $1,979,750. The Kinergy trade name is determined to have an indefinite
life and therefore, rather than being amortized, is being periodically tested
for impairment. The distribution backlog has an estimated life of six months and
customer relationships were estimated to have a ten-year life and, as a result,
will be amortized accordingly, unless otherwise impaired at an earlier time.

We made a $150,000 cash payment and issued stock valued at $316,250 for the
acquisition of ReEnergy. In addition, certain stockholders sold stock to the
members of ReEnergy, increasing the purchase price by $506,000. The purchase
price for ReEnergy totaled $972,250. Of this amount, $120,000 was recorded as an
intangible asset for the fair value of a favorable option to acquire land and
because the acquisition of ReEnergy was not deemed to be an acquisition of a
business, the remaining purchase price of $852,250 was recorded as an expense
for services rendered in connection with a feasibility study. The ReEnergy land
option will expire on December 15, 2005 and will be expensed at that time if not
extended.

RESULTS OF OPERATIONS

The tables presented below, which compare our results of operations from
one period to another, present the results for each period, the change in those
results from one period to another in both dollars and percentage change, and
the results for each period as a percentage of net sales. The columns present
the following:

o The first two data columns in each table show the absolute results for
each period presented.
o The columns entitled "Dollar Variance" and "Percentage Variance" show
the change in results, both in dollars and percentages. These two
columns show favorable changes as a positive and unfavorable changes
as negative. For example, when our net sales increase from one period
to the next, that change is shown as a positive number in both
columns. Conversely, when expenses increase from one period to the
next, that change is shown as a negative in both columns.
o The last two columns in each table show the results for each period as
a percentage of net sales.

NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2004

RESULTS AS A PERCENTAGE
DOLLAR PERCENTAGE OF NET SALES FOR THE
NINE MONTHS ENDED VARIANCE VARIANCE NINE MONTHS ENDED
SEPTEMBER 30, ------------ ----------- SEPTEMBER 30,
------------------------- FAVORABLE FAVORABLE ------------------------
2005 2004 (UNFAVORABLE) (UNFAVORABLE) 2005 2004
----------- ----------- ------------ ----------- ---------- ----------

Net sales ................................... $51,530,735 $ 16,832 $ 51,513,903 306,047.4% 100.0% 100.0%
Cost of sales ............................... 49,695,870 10,789 (49,685,081) (460,516.1) 96.4 64.1
----------- ----------- ------------ ----------- ---------- ----------
Gross profit ................................ 1,834,865 6,043 1,828,822 30,263.5 3.6 35.9
Selling, general and administrative
expenses .................................. 3,999,653 714,730 (3,284,923) (459.6) 7.8 4,246.2
Services rendered in connection with
feasibility study ......................... 852,250 -- (852,250) (100.0) 1.7 --
Non-cash compensation and consulting fees ... 1,749,967 862,500 (887,467) (102.9) 3.4 5,124.2
----------- ----------- ------------ ----------- ---------- ----------
Loss from operations ........................ (4,767,005) (1,571,187) (3,195,818) (203.4) (9.3) (9,334.5)
Total other expense ......................... (33,740) (413,358) 379,618 91.8 -- (2,455.8)
----------- ----------- ------------ ----------- ---------- ----------
Loss from operations before income taxes .... (4,800,745) (1,984,545) (2,816,200) (141.9) (9.3) (11,790.3)
Provision for income taxes .................. 5,600 8,400 2,800 33.3 -- (49.9)
----------- ----------- ------------ ----------- ---------- ----------
Net loss .................................... $(4,806,345) $(1,992,945) $ (2,813,400) (141.2)% (9.3)% (11,840.2)%
=========== =========== ============ =========== ========== ==========

NET SALES. Net sales for the nine months ended September 30, 2005 increased
by $51,513,903 to $51,530,735 as compared to $16,832 for the nine months ended
September 30, 2004. Sales attributable to the acquisition of Kinergy on March
23, 2005 contributed $51,513,903 of this increase. Without the acquisition of
Kinergy, our net sales would have been $0. This was due to ceasing our
transloading services in order to begin construction of our Madera County
ethanol plant on this site.

GROSS PROFIT. Gross profit for the nine months ended September 30, 2005
increased by $1,828,822 to $1,834,865 as compared to $6,043 for the nine months
ended September 30, 2004, primarily due to the acquisition of Kinergy on March
23, 2005. Gross profit as a percentage of net sales decreased to 3.6% for the
nine months ended September 30, 2005 as compared to 36% for the nine months
ended September 30, 2004. This difference is attributable to the acquisition of
Kinergy on March 23, 2005.

Kinergy's gross profit margin declined by 8% from 3.9% in 2004 to 3.6% for
the nine months ended September 30, 2005. The decline in Kinergy's gross profit
margin for the first nine months of 2005 resulted primarily from a combination
of factors. The transition from inventory sales contracts ending in the first
quarter of 2005 to new inventory sales contracts beginning in the second quarter
of 2005 during a period of rapidly declining market prices reduced gross profit
margins for the first and second quarters of 2005. This reduction was offset by
rapidly increasing market prices during the third quarter of 2005 resulting in a
gross profit margin of 6.2% for that period and a combined gross profit margin
of 3.6% for the nine months ended September 30, 2005. Kinergy sold ethanol under
these contracts from existing inventory that was purchased at levels higher than
the prevailing market price at the time of sale in the second quarter of 2005
and conversely sold ethanol under these contracts from existing inventory that
was purchase at levels lower than the prevailing market price at the time of
sale in the third quarter. Accordingly, the fluctuation in ethanol prices during
the nine months ended September 30, 2005, had the net effect of reducing
Kinergy's gross profit margin by 8% from 3.9% in 2004 to 3.6% for the nine
months ended September 30, 2005.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the nine months ended September 30, 2005 increased
by $3,284,923 (460%) to $3,999,653 as compared to $714,730 for the nine months
ended September 30, 2004. This increase was primarily due to $1,227,250 in
additional legal, accounting and consulting fees, $427,668 for amortization of
intangibles and $506,292 in additional payroll expense related to the three
executive employment agreements that became effective upon the consummation of
the Share Exchange Transaction on March 23, 2005, the addition of two staff
positions in May and June 2005, an employee promotion in May 2005, the addition
of two executive positions in June 2005, the addition of two high-level ethanol
plant management positions in September 2005. The increase in selling, general
and administrative expenses also was due to a $300,000 increase from the accrual
of a bonus due Neil M. Koehler under his employment agreement, $143,998 in
additional insurance expense related to the addition of a directors and officers
insurance policy in October 2004, the addition of a property and general
liability policy for Kinergy in April, and an insurance premium increase
effective June 2004 related to a silo fire that occurred in January 2004 at our
Madera County grain facility, a $154,918 increase for expenses related to the
termination of the proposed acquisition of Phoenix Bio-Industries, LLC, a
$128,259 increase in business travel expenses, a $97,401 increase in research
and development expense, a $63,818 increase in market and filing fees, a $61,300
increase in policy and investor relations expenses, a $41,281 increase in rents,
a $35,909 increase in marketing expense, an $18,665 increase in dues and trade
memberships, a $15,260 increase in telephone expense, a $7,158 increase in bad
debt expense, and the net balance of $55,746 related to various increases in
other selling, general and administrative expenses.

We expect that over the near term, our selling, general and administration
expenses will increase as a result of, among other things, increased legal and
accounting fees associated with increased corporate governance activities in
response to the Sarbanes-Oxley Act of 2002, recently adopted rules and
regulations of the Securities and Exchange Commission, the filing of a
registration statement with the Securities and Exchange Commission to register
for resale the shares of common stock and shares of common stock underlying
warrants issued in various private offerings, increased employee costs
associated with planned staffing increases, increased sales and marketing
expenses, increased activities related to the construction of our Madera County
ethanol production facility and increased activity in searching for and
analyzing potential acquisitions.

SERVICES RENDERED IN CONNECTION WITH FEASIBILITY STUDY. Services rendered
in connection with feasibility study for the nine months ended September 30,
2005 increased by $852,250 (100%) as compared to $0 for the nine months ended
September 30, 2004. This expense arose in connection with the acquisition of
ReEnergy and relates to a feasibility study for an ethanol plant in Visalia,
California. Based on this study, ReEnergy entered into an option to buy land for
the ethanol plant site at a fixed price of $12,000 per acre.

NON-CASH COMPENSATION AND CONSULTING FEES. Non-cash compensation and
consulting fees for the nine months ended September 30, 2005 increased by
$887,467 (103%) to $1,749,967 as compared to $862,500 for the nine months ended
September 30, 2004. Of this amount, $651,000 related to non-cash compensation
from stock grants in connection with the hiring of two employees, $232,250
related to a stock grant that vested upon closing of the Share Exchange
Transaction on March 23, 2005, $70,500 related to non-cash consulting fees for
stock options granted to a consulting firm in connection with the employment of
our Chief Financial Officer, $46,800 related to non-cash compensation for stock
options granted in connection with the hiring of two ethanol plant managers,
$21,656 related to non-cash compensation for stock options granted to reward
employees for past performance, and $134,739 related to a decrease in non-cash
consulting fees for warrants that were granted in February 2004 and that vested
over one year. We expect to incur non-cash consulting fee expenses for warrants
granted in connection with the consummation of the Share Exchange Transaction
that vest ratably over two years in the amount of $89,125 per month for the
remainder of the two-year term ending on March 23, 2007.

OTHER INCOME/(EXPENSE). Other income/(expense) increased by $379,618 to
$(33,740) for the nine months ended September 30, 2005 as compared to ($413,358)
for the nine months ended September 30, 2004, primarily due to approximately
$255,688 of interest income on cash held in seven day investment accounts and a
net decrease of $123,930 in interest expense related to long-term debt,
amortization of discount, and construction payables, net of capitalized interest
related to our planned Madera County ethanol plant.

YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003

RESULTS AS A PERCENTAGE
DOLLAR PERCENTAGE OF NET SALES FOR THE
YEAR ENDED VARIANCE VARIANCE YEAR ENDED
DECEMBER 31, ----------- --------- DECEMBER 31,
------------------------- FAVORABLE FAVORABLE ------------------------
2004 2003 (UNFAVORABLE) (UNFAVORABLE) 2004 2003
----------- ----------- ----------- --------- ---------- ----------

Net sales ..................................... $ 19,764 $ 1,016,594 (996,830) (98.1)% 100.0% 100.0%
Cost of sales ................................. 12,523 946,012 933,489 98.7 63.4 93.1
----------- ----------- ----------- --------- ---------- ----------
Gross profit .................................. 7,241 70,582 (63,341) (89.7) 36.6 6.9
Selling, general and administrative expenses .. 1,070,010 647,731 (422,279) (65.2) 5,413.9 63.7
Non-cash compensation and consulting fees ..... 1,207,500 -- (1,207,500) -- 6,109.6 --
----------- ----------- ----------- --------- ---------- ----------
Loss from operations .......................... (2,270,269) (577,149) (1,693,120) (293.4) (11,486.9) (56.8)
Total other expense ........................... (530,698) (279,930) (250,768) (89.6) 2,685.2 27.5
----------- ----------- ----------- --------- ---------- ----------
Loss from operations before income taxes ...... (2,800,967) (857,079) (1,943,888) (226.8) (14,172.1) (84.3)
Provision for income taxes .................... (1,600) (1,600) -- -- 8.1 0.2
----------- ----------- ----------- --------- ---------- ----------
Net loss ...................................... $(2,802,567) $ (858,679) $(1,943,888) (226.4)% (14,180.2)% (84.5)%
=========== =========== =========== ========= ========== ==========

NET SALES. Net sales for the year ended December 31, 2004 decreased by
$996,830 to $19,764 as compared to $1,016,594 for the year ended December 31,
2003. This decrease resulted from a decrease in our sales of grain inventory
acquired in the purchase of a grain facility and reluctance by management to
pursue further grain plant operations during the construction of our ethanol
plant on this site.

GROSS PROFIT. Gross profit for the year ended December 31, 2004 decreased
by $63,341 to $7,241 as compared to $70,582 for the year ended December 31,
2003, primarily due to the decrease in grain inventory sales. Gross profit as a
percentage of net sales increased to 36.6% for the year ended December 31, 2004
as compared to 6.9% for the year ended December 31, 2003. This difference is
attributable to the relative decrease in net sales and decrease in cost of sales
for the year ended December 31, 2004 as compared to the year ended December 31,
2003.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the year ended December 31, 2004 increased by
$422,279 (65.2%) to $1,070,010 as compared to $647,731 for the year ended
December 31, 2003. This increase was primarily due to additional payroll expense
of approximately $188,000 associated with having wages for only six months in
2003, an increase in salary for one employee in connection with a promotion in
May 2004, and adding a staff and controller position in March and June of 2004,
respectively, an increase of approximately $90,000 for professional fees and
consulting expenses and an increase of approximately $105,000 for an insurance
premium increase effective June 2004 related to a silo fire that occurred in
January 2004 at our Madera County grain facility and a full year of premiums in
2004 as compared to a partial year of premiums in 2003 resulting from our
purchase of our Madera County grain facility in June 2003. Other significant
expense increases consisted of approximately $34,000 in property taxes, $33,000
in depreciation expense, $29,000 in utility and telephone expense, $28,000 in
computer and website expense, $19,000 in rents, $18,000 in business travel
expense, and $49,000 for all other operating expenses, all associated with
twelve months of expense in 2004 compared to approximately 6 months of expense
in 2003 related to the purchase of our Madera County grain facility in June
2003. Decreases of approximately $92,000 for impaired goodwill and $19,000 for
settled corn contracts were one time charges in 2003. An additional decrease of
approximately $60,000 resulted from a marketing event that occurred in 2003 but
that was not repeated in 2004. We expect that over the near term, our selling,
general and administration expenses will increase as a result of continued
company growth.

NON-CASH COMPENSATION AND CONSULTING FEES. Non-cash compensation and
consulting fees for the year ended December 31, 2004 increased to $1,207,500 as
compared to none for the year ended December 31, 2003. All of this $1,207,500
increase related to non-cash consulting fees for warrants.

TOTAL OTHER EXPENSE. Total other expense increased by $250,768 to $530,698
for the year ended December 31, 2004 as compared to $279,930 for the year ended
December 31, 2003, primarily due to interest expense on debt that arose in
connection with the acquisition of a grain facility.

LIQUIDITY AND CAPITAL RESOURCES

During the nine months ended September 30, 2005, we funded our operations
primarily from net income of $1,377,138 from Kinergy and $18,879,749 in net
proceeds we received in connection with a private offering of equity securities
on March 23, 2005, as described below. As of September 30, 2005, we had working
capital of $11,306,924, which represented a $12,331,671 increase from negative
working capital of $1,024,747 at December 31, 2004, primarily due to the
proceeds from the private offering. As of September 30, 2005 and December 31,
2004, we had accumulated deficits of $8,467,591 and $3,661,246, respectively,
and cash and cash equivalents of $11,344,034 and $42, respectively.

Our current available capital resources consist primarily of approximately
$11.3 million in cash as of September 30, 2005. This amount was primarily raised
through the private offering by PEI California described below. We expect that
our future available capital resources will consist primarily of any balance of
the $11.3 million in cash as of September 30, 2005, cash generated from
Kinergy's ethanol marketing business, if any, and future debt and/or equity
financings, if any.

Accounts receivable increased $2,410,134 during the nine months ended
September 30, 2005 from $8,464 as of December 31, 2004 to $2,418,598 as of
September 30, 2005. Sales attributable to the acquisition of Kinergy contributed
substantially all of this increase.

Inventory balances increased $633,691 during the nine months ended
September 30, 2005, from $0 as of December 31, 2004 to $633,691 as of September
30, 2005 because of the acquisition of Kinergy. Inventory represented 1.6% of
our total assets as of September 30, 2005.

Cash used in our operating activities totaled $1,729,288 for the nine
months ended September 30, 2005 as compared to cash used by operating activities
of $120,991 for the nine months ended September 30, 2004. This $1,608,297
increase in cash used in operating activities primarily resulted from an
increase in pre-paid expenses.

Cash used in our investing activities totaled $6,321,638 for the nine
months ended September 30, 2005 as compared to $754,132 of cash used for the
nine months ended September 30, 2004. Included in the results for the nine
months ended September 30, 2005 are net cash of $307,808 used in connection with
the Share Exchange Transaction, net cash of $7,146,598 used to purchase
property, plant and equipment, $10,000 used for an option to acquire land,
$4,086 used for a security deposit, and net cash of $1,146,854 that we acquired
in connection with the Share Exchange Transaction.

Cash provided by our financing activities totaled $19,394,918 for the nine
months ended September 30, 2005 as compared to $846,947 for the nine months
ended September 30, 2004. The change is primarily due to the net proceeds of
$18,879,749 from a private offering of equity securities on March 23, 2005, as
further described below.

In November 2005, we entered into a purchase agreement with Cascade
Investment, L.L.C that provides for the purchase and sale of 5,250,000 shares of
our Series A Cumulative Redeemable Convertible Preferred Stock for an aggregate
purchase price of $84.0 million. Of the $84.0 million aggregate purchase price,
$4.0 million is payable to us at closing and $80.0 million is to be deposited
into a restricted cash account and disbursed in accordance with a deposit
agreement to be executed at closing. Upon closing, if it occurs, we would be
entitled to use the initial $4.0 million of proceeds for general working capital
and must use the remaining $80.0 million for the construction or acquisition of
one or more ethanol production facilities in accordance with the terms of the
deposit agreement. The closing of the purchase and sale of the preferred stock
is subject to numerous customary conditions. The closing is also subject to
approval of the transaction by our stockholders. In addition, the closing is
subject to execution and delivery in form and substance satisfactory to the
purchaser of agreements relating to the construction, operation and financing of
our Madera County ethanol production facility. An additional condition to the
closing provides that the closing must occur on or before March 31, 2006 unless
the purchaser has extended the closing date. Because of the numerous conditions
to closing, it is possible that we may never complete, or receive any proceeds
from, this transaction.

We have a $2.0 million revolving line of credit with Comerica Bank, or
Comerica, that we use from time to time in connection with the operations of
Kinergy. Principal amounts outstanding under the line of credit accrue interest,
on a per annum basis, at Comerica's "base rate" of interest plus 1.0%.
Comerica's "base rate" of interest is currently the prime rate of interest and
is subject to adjustment from time to time by Comerica. As of September 30,
2005, the interest rate on principal amounts outstanding under the line of
credit would have been 7.75%.

We have used a portion of the net proceeds from the private offering that
occurred in March 2005 to fund our working capital requirements and begin site
preparation at our Madera County site. We expect to use the remainder of the net
proceeds from this offering to fund our working capital requirements over the
next 12 months and to continue construction of our first ethanol production
facility in Madera County. These net proceeds, and additional debt and/or equity
capital that we intend to raise, are expected to be used as follows for a total
cost of completion of our Madera County ethanol production facility estimated at
approximately $55.0 million: grain and WDG handling ($1.2 million); site work
($2.3 million); building and concrete ($7.7 million); site utilities ($3.3
million); process utilities ($3.9 million); mash preparation, fermentation and
carbon dioxide scrubbing ($2.4 million); distillation, dehydration, separation
and evaporation ($4.9 million); equipment installation ($1.8 million); piping
($5.7 million); electrical ($3.6 million); engineering and general conditions
($12.5 million); and miscellaneous ($5.6 million). The above amounts do not
include up to $5.0 million in additional funding required for capital raising
costs and expenses. Significant additional funding is required to complete
construction of this ethanol facility and we may not be successful in obtaining
these additional funds. See "Risk Factors."

On March 23, 2005, prior to the consummation of the Share Exchange
Transaction, PEI California issued to 63 accredited investors in a private
offering an aggregate of 7,000,000 shares of common stock at a purchase price of
$3.00 per share, two-year investor warrants to purchase 1,400,000 shares of
common stock at an exercise price of $3.00 per share and two-year investor
warrants to purchase 700,000 shares of common stock at an exercise price of
$5.00 per share, for total gross proceeds of approximately $21,000,000. PEI
California paid cash placement agent fees and expenses of approximately
$1,850,400 and issued five-year placement agent warrants to purchase 678,000
shares of common stock at an exercise price of $3.00 per share in connection
with the offering. Additional costs related to the financing include legal,
accounting and consulting fees that totaled approximately $272,366 through
September 30, 2005 and continue to be incurred in connection with various
securities filings and the registration statement described below.

We are obligated under a Registration Rights Agreement related to the above
financing to file, on the 151st day following March 23, 2005, a Registration
Statement with the Securities and Exchange Commission, or the Commission,
registering for resale shares of common stock, and shares of common stock
underlying investor warrants and certain of the placement agent warrants, issued
in connection with the private offering. If we (i) do not file the Registration
Statement within the time period prescribed, or (ii) fail to file with the
Commission a request for acceleration in accordance with Rule 461 promulgated
under the Securities Act of 1933, within five trading days of the date that we
are notified (orally or in writing, whichever is earlier) by the Commission that
the Registration Statement will not be "reviewed," or is not subject to further
review, or (iii) the Registration Statement filed or required to be filed under
the Registration Rights Agreement is not declared effective by the Commission on
or before November 3, 2005, or (iv) after the Registration Statement is first
declared effective by the Commission, it ceases for any reason to remain
continuously effective as to all securities registered thereunder, or the
holders of such securities are not permitted to utilize the prospectus contained
in the Registration Statement to resell such securities, for more than an
aggregate of 45 trading days during any 12-month period (which need not be
consecutive trading days) (any such failure or breach being referred to as an
"Event," and for purposes of clause (i) or (iii) the date on which such Event
occurs, or for purposes of clause (ii) the date on which such five-trading day
period is exceeded, or for purposes of clause (iv) the date on which such
45-trading day-period is exceeded being referred to as "Event Date"), then in
addition to any other rights the holders of such securities may have under the
Registration Statement or under applicable law, then, on each such Event Date
and on each monthly anniversary of each such Event Date (if the applicable Event
shall not have been cured by such date) until the applicable Event is cured, we
are required to pay to each such holder an amount in cash, as partial liquidated
damages and not as a penalty, equal to 2.0% of the aggregate purchase price paid
by such holder pursuant to the Securities Purchase Agreement relating to such
securities then held by such holder. If we fail to pay any partial liquidated

damages in full within seven days after the date payable, we are required to pay
interest thereon at a rate of 18% per annum (or such lesser maximum amount that
is permitted to be paid by applicable law) to such holder, accruing daily from
the date such partial liquidated damages are due until such amounts, plus all
such interest thereon, are paid in full. The partial liquidated damages are to
apply on a daily pro-rata basis for any portion of a month prior to the cure of
an Event.

The Registration Rights Agreement also provides for customary piggy-back
registration rights whereby certain holders of shares of our common stock, or
warrants to purchase shares of our common stock, can cause us to register such
shares for resale in connection with our filing of a Registration Statement with
the Commission to register shares in another offering. The Registration Rights
Agreement also contains customary representations and warranties, covenants and
limitations.

The Registration Statement was not declared effective by the Securities and
Exchange Commission on or before 225 days following March 23, 2005. We
endeavored to have all security holders entitled to these registration rights
execute amendments to the Registration Rights Agreement reducing the penalty
from 2.0% to 1.0% of the aggregate purchase price paid by such holder pursuant
to the Securities Purchase Agreement relating to such securities then held by
such holder. This penalty reduction applies to penalties accrued on or prior to
January 31, 2006 as a result of the related Registration Statement not being
declared effective by the Securities and Exchange Commission. Certain of the
security holders executed this amendment. However, not all security holders
executed this amendment and as a result, we paid an aggregate of $298,050 in
penalties on November 8, 2005, which will be recorded in the quarterly period
ending December 31, 2005.

We believe that current and future available capital resources, revenues
generated from operations, and other existing sources of liquidity, including
the credit facilities we have and the remaining proceeds we have from PEI
California's March 2005 private offering, will be adequate to meet our
anticipated working capital and capital expenditure requirements for at least
the next twelve months. If, however, our capital requirements or cash flow vary
materially from our current projections, if unforeseen circumstances occur, or
if we require a significant amount of cash to fund future acquisitions, we may
require additional financing. Our failure to raise capital, if needed, could
restrict our growth, limit our development of new products or hinder our ability
to compete.

EFFECTS OF INFLATION

The impact of inflation and changing prices has not been significant on the
financial condition or results of operations of either our company or our
operating subsidiaries.

IMPACTS OF NEW ACCOUNTING PRONOUNCEMENTS

In November 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4," SFAS No.
151 clarifies that abnormal inventory costs such as costs of idle facilities,
excess freight and handling costs, and wasted materials (spoilage) are required
to be recognized as current period costs. The provisions of SFAS No. 151 are
effective for our fiscal 2006. We are currently evaluating the provisions of
SFAS No. 151 and do not expect that adoption will have a material effect on our
financial position, results of operations or cash flows.

In December 2004, the FASB issued SFAS 123R, SHARE-BASED PAYMENT ("SFAS
123R") which is a revision of SFAS 123 and supersedes Accounting Principles
Board ("APB") 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"). Among
other items, SFAS 123R eliminates the use of APB 25 and the intrinsic value
method of accounting, and requires companies to recognize the cost of employee
services received in exchange for awards of equity instruments, based on the

grant date fair value of those awards, in the financial statements. The
effective date of SFAS 123R is the first reporting period beginning after
December 15, 2005. SFAS 123R permits companies to adopt its requirements using
either a "modified prospective" method, or a "modified retrospective" method.
Under the "modified prospective" method, compensation cost is recognized in the
financial statements beginning with the effective date, based on the
requirements of SFAS 123R for all share-based payments granted after that date,
and based on the requirements of SFAS 123 for all unvested awards granted prior
to the effective date of SFAS 123R. Under the "modified retrospective" method,
the requirements are the same as under the "modified prospective" method, but
also permits entities to restate financial statements of previous periods based
on pro forma disclosures made in accordance with SFAS 123.

We currently utilize a standard option pricing model (i.e., Black-Scholes)
to measure the fair value of stock options granted to employees. While SFAS 123R
permits entities to continue to use such a model, the standard also permits the
use of a "lattice" model. We have not yet determined which model we will use to
measure the fair value of employee stock options upon the adoption of SFAS 123R.

We currently expect to adopt SFAS 123R effective January 1, 2006. However,
because we have not yet determined which of the aforementioned adoption methods
we will use, we have not yet determined the impact of adopting SFAS 123R.

BUSINESS

OVERVIEW

Our primary goal is to become a leader in the production, marketing and
sale of ethanol and other renewable fuels in the Western United States.

Through our wholly-owned subsidiary, Kinergy Marketing, LLC, or Kinergy, we
are currently engaged in the business of marketing ethanol in the Western United
States. We provide transportation, storage and delivery of ethanol through
third-party service providers. We sell ethanol primarily in California, Nevada,
Arizona and Oregon and have extensive customer relationships throughout the
Western United States and extensive supplier relationships throughout the
Western and Midwestern United States. We do not currently produce any ethanol
that we sell. Until we commence the production of ethanol, if at all, we expect
our operations to consist primarily of the marketing and sale of ethanol
produced by third-parties. Accordingly, we expect that until we complete the
construction of our initial ethanol production facility in Madera County,
California, our consolidated net sales will consist solely of net sales
generated by Kinergy. We anticipate that our sales will grow in the long-term as
demand for ethanol increases and as a result of our marketing agreements with
third-party ethanol producers.

Through our wholly-owned subsidiary, Pacific Ethanol California, Inc., or
PEI California, we are constructing an ethanol production facility in Madera
County to begin the production and sale of ethanol and its co-products if we are
able to secure all the necessary financing to complete construction of this
facility. To date, we have not obtained all of this financing. See "Risk Factors
- Risks Relating to the Business of PEI California." We also intend to construct
or otherwise acquire one or more additional ethanol production facilities as
financing resources and business prospects make the construction or acquisition
of these facilities advisable. PEI California has, to date, not conducted any
significant business operations other than the acquisition of real property
located in Madera County on which we are constructing our first ethanol
production facility.

INDUSTRY OVERVIEW

OVERVIEW OF ETHANOL MARKET

Methyl tertiary-butyl ether, or MTBE, was used for over 20 years in
California and other states as an oxygenate. An oxygenate is a substance that,
when added to gasoline, increases the amount of oxygen in the gasoline blend and
improves its air quality characteristics. Oxygenated fuels sometimes are
mandated by the Environmental Protection Agency, or EPA, for sale and use in
geographical areas which fail to achieve certain air quality standards. MTBE is,
however, a known carcinogen that contaminates groundwater, and California banned
the addition of MTBE to motor fuels effective January 1, 2004. The EPA lists on
its website at least 20 states with partial or complete bans on the use of MTBE.
Ethyl alcohol, or ethanol, has recently replaced MTBE as a fuel additive and an
oxygenate in California, New York and Connecticut. According to the California
Air Resources Board, ethanol is the only commercially available fuel additive
that can replace MTBE to meet the federal Clean Air Act's oxygenate requirement
in the State of California. According to the United States Energy Information
Administration, or the USEIA, ethanol accounted for more than 67% of the
oxygenate market nationwide during February 2005.

California is the nation's largest market for gasoline. According to the
California Department of Motor Vehicles, approximately 28 million motor vehicles
were registered in California in 2003 and were estimated to use over 15 billion
gallons of gasoline during 2003. California's last oil refinery was built in
1969. We believe that California's stringent permitting process and the
economics of constructing and operating an oil refinery in California present
difficult barriers to entry into the oil refining market. In addition, we
believe that California is in a volatile and highly sensitive energy situation
due to its relative geographic isolation from oil refiners located elsewhere in
the United States coupled with what we believe is an overall decline in
production capacity in the United States. According to the California Energy
Commission, California imports approximately 10% of its finished fuel products
and during 2004 over 55% of its total petroleum supply.

We expect the ethanol industry to produce up to 4.0 billion gallons of
ethanol in 2005, an increase of approximately 18% from the approximately 3.4
billion gallons of ethanol produced in 2004. We believe that the ethanol market
in California will exceed 950 million gallons, or more than 25% of the national
market in 2005. However, we believe that California has only three ethanol
plants with a combined production capacity of less than 35 million gallons per
year, leaving California with ethanol production levels substantially below the
demand for ethanol in California. The balance of ethanol is shipped via rail
from the Midwest to California. Gasoline and diesel products that supply the
major fuel terminals are shipped in pipelines throughout the northern and
southern portions of California. Unlike gasoline and diesel, however, ethanol
cannot be shipped in these pipelines because ethanol has an affinity for mixing
with water already present in the pipelines. When mixed, water dilutes ethanol
and creates significant quality control issues. Therefore, ethanol must be
trucked from rail terminals to regional fuel terminals, or blending racks.

We believe that approximately 95% of the ethanol produced in the United
States is made in the Midwest from corn. According to the U.S. Department of
Energy, ethanol is typically blended at 5.7% to 10% by volume in the United
States, but is also blended at up to 85% by volume for vehicles designed to
operate on 85% ethanol. Compared to gasoline, ethanol is generally considered to
be less expensive and cleaner burning and contains higher octane. We anticipate
that the increasing demand for transportation fuels coupled with limited
opportunities for gasoline refinery expansions and the growing importance of
reducing CO2 emissions through the use of renewable fuels will generate
additional growth in the California ethanol market.

Ethanol sold into the Central Valley region of California, or Central
Valley, is currently shipped via rail from the Midwest, and then
"double-handled" into trucks and shipped to blending racks in Sacramento,
Stockton, Fresno and Bakersfield. We believe that this one to two thousand mile
transport and "double handling" can add significantly to the final price of
ethanol. We estimate that ethanol demand in the Central Valley was approximately
200 million gallons in 2004.

We believe that ethanol prices, net of tax incentives offered by the
federal government, are positively correlated to fluctuations in gasoline
prices. In addition, we believe that ethanol prices in California are typically
$.10 to $.12 per gallon higher than in the Midwest due to the freight costs of
delivering ethanol from Midwest production facilities.

OVERVIEW OF ETHANOL PRODUCTION PROCESS

The production of ethanol from starch or sugar-based feedstocks has been
practiced for thousands of years. While the basic production steps remain the
same, the process has been refined considerably in recent years, leading to a
highly-efficient process that we believe now yields more energy in the ethanol
and co-products than is required to make the products. The modern production of
ethanol requires large amounts of corn, or other high-starch grains, and water
as well as chemicals, enzymes and yeast, and denaturants such as unleaded
gasoline or liquid natural gas, in addition to natural gas and electricity.

In the dry milling process, corn or other high-starch grains are first
ground into meal and then slurried with water to form a mash. Enzymes are then
added to the mash to convert the starch into the simple sugar, dextrose. Ammonia
is also added for acidic (pH) control and as a nutrient for the yeast. The mash
is processed through a high temperature cooking procedure, which reduces
bacteria levels prior to fermentation. The mash is then cooled and transferred
to fermenters, where yeast is added and the conversion of sugar to ethanol and
CO2 begins.

After fermentation, the resulting "beer" is transferred to distillation,
where the ethanol is separated from the residual "stillage." The ethanol is
concentrated to 190 proof using conventional distillation methods and then is
dehydrated to approximately 200 proof, representing 100% alcohol levels, in a
molecular sieve system. The resulting anhydrous ethanol is then blended with
about 5% denaturant, which is usually gasoline, and is then ready for shipment
to market.

The residual stillage is separated into a coarse grain portion and a liquid
portion through a centrifugation process. The soluble liquid portion is
concentrated to about 40% dissolved solids by an evaporation process. This
intermediate state is called condensed distillers solubles, or syrup. The coarse
grain and syrup portions are then mixed to produce wet distillers grains, or
WDG, or can be mixed and dried to produce dried distillers grains with solubles,
or DDGS. Both WDG and DDGS are high-protein animal feed products.

OVERVIEW OF DISTILLERS GRAINS MARKET

We believe that approximately 5.8 to 6.8 million tons of dried distillers
grains are produced and sold every year in North America. Dairy cows and beef
cattle are the primary consumers of distillers grains. According to Rincker and
Berger, in their 2003 article entitled OPTIMIZING THE USE OF DISTILLER GRAIN FOR
DAIRY-BEEF PRODUCTION, a dairy cow can consume 12-15 lbs of WDG per day in a
balanced diet. At this rate, the WDG output of an ethanol facility that produces
25 million gallons of ethanol per year can feed approximately 75,000-95,000
dairy cows and an ethanol facility that produces 35 million gallons of ethanol
per year can feed approximately 105,000-130,000 dairy cows. We believe that the
only distillers grains currently available in California are shipped from the
Midwest via rail cars in dry form.

Successful and profitable delivery of DDGS from the Midwest faces a number
of challenges, including product inconsistency, handling difficulty and lower
feed values. All of these challenges are mitigated with a consistent supply of
WDG from a local plant. DDGS delivered via rail to California from the Midwest
undergoes an intense drying process and exposure to extreme heat at the
production facility and in the railcars, during which various nutrients are
burned off which reduces the nutritional composition of the final product. In
addition, DDGS shipped via rail can take as long as two weeks to be delivered to
California, and scheduling errors or rail yard mishaps can extend delivery time
even further. DDGS tends to solidify and set in place as it sits in a rail car
and thus expedient delivery is important. After solidifying and setting in
place, DDGS becomes very difficult and thus expensive to unload. During the
summer, rail cars typically take a full day to unload but can take longer. Also,
DDGS shipped from the Midwest can be inconsistent because some Midwest producers
use a variety of feedstocks depending on the availability and price of competing
crops. Corn, milo sorghum, barley and wheat are all common feedstocks used for
the production of ethanol but lead to significant variability in the nutritional
composition of distillers grains. California dairies depend on rations that are
calculated with precision and a subtle difference in the makeup of a key
ingredient can significantly affect milk production at dairies. By not drying
the distillers grains and by shipping them locally, we believe that we will be
able to preserve the feed integrity of these grains.

Historically, the market price for distillers grains has been stable in
comparison to the market price for ethanol. We believe that the market price of
DDGS is determined by a number of factors, including the market value of corn,
soybean meal and other competitive protein ingredients, the performance or value
of DDGS in a particular feed formulation and general market forces of supply and
demand. We also believe that nationwide, the market price of distillers grains
historically has been influenced by producers of distilled spirits and more
recently by the large corn dry-millers that operate fuel ethanol plants. In
California, the market price of distillers grains is often influenced by
nutritional models that calculate the feed value of distillers grains by
nutritional content.

OUR STRATEGY

Our primary goal is to become a leader in the production, marketing and
sale of ethanol and other renewable fuels in the Western United States. Our
business strategy to achieve this goal includes the following elements:

o CONTINUE TO DEVELOP AND EXPAND OUR ETHANOL DISTRIBUTION NETWORK. We
have developed and plan to continue to develop and expand, our ethanol
distribution network for delivery of ethanol by truck to virtually
every significant fuel terminal as well as to numerous smaller fuel
terminals throughout California. Fuel terminals have limited storage
capacity and we have been successful in securing storage tanks in
California. In addition, we have an extensive network of third-party
delivery trucks available to deliver ethanol throughout California.

o CONTINUE TO EXPAND OUR BUSINESS IN GROWING GEOGRAPHIC MARKETS. We
intend to continue to expand our business in regions where MTBE has
been banned and that represent growing markets for ethanol, including
Phoenix, Arizona, Las Vegas, Nevada and Portland, Oregon.

o MAKE STRATEGIC ACQUISITIONS OF EXISTING OR PENDING ETHANOL PRODUCTION
FACILITIES. We plan to explore opportunities to make strategic
acquisitions of existing or pending ethanol production facilities. In
circumstances where, in our judgment, the acquisition of existing or
pending ethanol production facilities represents an opportunity to
more quickly or successfully meet our business goals, we intend to
undertake to consummate these acquisitions.

o COMPLETE CONSTRUCTION OF OUR FIRST ETHANOL PRODUCTION FACILITY AND
BEGIN PRODUCING ETHANOL AND CO-PRODUCTS. We are constructing an
ethanol production facility to produce ethanol and its co-products,
specifically, WDG and CO2, for sale in the Central Valley. We believe
that, following the completion of construction of our 35 million
gallon per year ethanol plant in Madera County, if it occurs, we will
be the largest producer of ethanol in California and that our
proximity to the geographic market in which we plan to sell our
ethanol provides us significant competitive advantages over ethanol
producers in the Midwest.

o IDENTIFY AND EXPLOIT NEW RENEWABLE FUELS AND TECHNOLOGIES. We plan to
identify and exploit new renewable fuels and technologies. For
example, we are examining new technologies enabling the conversion of
cellulose, which is generated predominantly from wood waste, paper
waste and agricultural waste, into ethanol.

KINERGY CUSTOMERS

We purchase and resell ethanol to various customers in the Western United
States. We also arrange for transportation, storage and delivery of ethanol
purchased by our customers through our agreements with third-party service
providers. Our revenue is obtained primarily from sales of ethanol to large oil
companies.

During the first nine months of 2005, we purchased and resold an aggregate
of approximately 33.2 million gallons of fuel grade ethanol to approximately 21
customers. Sales to Kinergy's two largest customers represented in the aggregate
approximately 29% of our net sales in the first nine months of 2005. Sales to
each of our other customers did not represent 10% or more of our net sales in
the first nine months of 2005. Customers who accounted for 10% or more of our
sales in the first nine months of 2005 were New West Petroleum, which accounted
for 17% of our sales during that period and Chevron Products USA, which
accounted for 12% of our sales during that period.

During 2004, we purchased and resold an aggregate of approximately 53
million gallons of fuel grade ethanol to approximately 25 customers. Sales to
Kinergy's four largest customers represented in the aggregate approximately 49%
of Kinergy's total revenues in 2004. Sales to each of our other customers did
not represent 10% or more of our net sales in 2004. Customers who accounted for
10% or more of our sales in 2004 were Southern Counties Oil Co., a related
party, which accounted for 13% of our sales during that period and Conoco
Phillips, Chevron Products USA and Valero, each of which accounted for 12% of
our sales during that period.

Most of the major metropolitan areas in California have fuel terminals
served by rail, but other major metropolitan areas and more remote smaller
cities and rural areas in California do not. We believe that we have developed a
valuable niche in California by growing our business to supply customers in
areas without rail access at fuel terminals, which are primarily located in the
Sacramento, San Joaquin and Imperial Valleys of California. We manage the
complicated logistics of shipping ethanol from the Midwest by rail to
intermediate storage locations throughout the Western United States and trucking
the ethanol from these storage locations to blending racks where the ethanol is
blended with gasoline. We believe that by establishing an efficient service for
truck deliveries to these more remote locations, we have differentiated
ourselves from our competitors, which has resulted in increased sales and
profitability. In addition, by producing ethanol in California, we believe that
we will benefit from our ability to increase spot sales of ethanol from this
additional supply following ethanol price spikes caused from time to time by
rail delays in delivering ethanol from the Midwest to California.

In March 2005, we agreed with Phoenix Bio-Industries, LLC, or PBI, to
market and sell PBI's entire ethanol production from its facility in Goshen,
California, which is approximately fifty miles southeast of our Madera County
site. PBI commenced ethanol production at this facility in the fourth quarter of
2005 and we expect initial production to be approximately 25 million gallons per
year. The term of the agreement is two years from the date that ethanol is first
available for marketing from PBI's production facility. We believe that through
Kinergy, we could market and sell locally all of the 25 million gallons expected
to be produced each year at PBI's Goshen facility as well as all or
substantially all of the 35 million gallons of ethanol expected to be produced
each year at our Madera County ethanol production facility.

truck deliveries from inventory purchased by Kinergy in advance. For inventory
sales, as with direct sales, Kinergy typically matches ethanol purchase and sale
contracts of like quantities. However, timing differences do exist and
consequently, a back-to-back inventory sale may lag by up to two or more weeks.
This time lag results from inventory transit and turnover times. As a result,
Kinergy may supply ethanol under new inventory sales contracts from existing
inventory. These back-to-back inventory sales therefore involve some price risks
to Kinergy resulting from potential fluctuations in the market price of ethanol.

We believe that the only consistent price risk to Kinergy is currently
inventory risk. Management seeks to optimize transitions to new inventory sales
contracts and reduce the effects of declining ethanol prices by managing
inventory as carefully as possible to minimize inventory levels in anticipation
of declining ethanol prices. In addition, management seeks to maximize inventory
levels in anticipation of rising ethanol prices. Because Kinergy increases
inventory levels in anticipation of rising ethanol prices and decreases
inventory levels in anticipation of declining ethanol prices, it is subject to
the risk of ethanol prices moving in unanticipated directions, which could
result in declining or even negative gross profit margins over certain periods
of time, but also enables Kinergy to potentially benefit from above-normal gross
profit margins.

Over the past few years, the market price of ethanol has experienced
significant fluctuations. More recently, the price of ethanol declined by
approximately 25% from its 2004 average price per gallon in five months from
January 2005 through May 2005 and reversed this decline and increased to
approximately 55% above its 2004 average price per gallon in four months from
June 2005 through September 2005. We believe that the market price of ethanol
will, for the foreseeable future, continue to experience significant
fluctuations which may cause our future results of operations to fluctuate
significantly. As a result, our historical results of operations may not be
predictive of our future results of operations.

Historically, Kinergy's gross profit margins have averaged between 2.0% and
4.4%. Kinergy's gross profit margin in 2004 was 3.9%. We believe that Kinergy's
future gross profit margins will be lower than historical levels for two
principal reasons. First, higher ethanol sales volumes and increased competition
in the ethanol market have reduced margins, and will continue to reduce margins,
as compared to historical levels. Second, Kinergy is emphasizing direct sales to
a greater degree. Direct sales ordinarily have gross profit margins of
approximately 1.0% over periods of one year or more, a level that is consistent
with our recent ethanol marketing agreements with Front Range Energy, LLC and
PBI, and, we believe, with the ethanol marketing industry as a whole.
Historically, Kinergy's sales were comprised to a greater degree of inventory
sales that often involved the buying and selling of ethanol based on anticipated
trends in the market price of ethanol. These inventory sales represented
higher-risk positions but enabled Kinergy to achieve higher margin levels, as
compared to direct sales, as a result of correctly anticipating fluctuations in
the market price of ethanol. As a result of highly-volatile ethanol prices, we
are unable to estimate Kinergy's future gross profit margins from inventory
sales. However, we believe that over longer periods of up to a year or more, our
gross profit margin from inventory sales is unlikely to exceed our historic high
average gross profit margin of 4.4%.

We expect to begin to market and sell ethanol we produce upon completion of
construction of our initial ethanol production facility in Madera County. We
intend to continue to market ethanol and manage the shipping, storage and
delivery of ethanol from the Midwest to existing and new customers in the
Western United States. In addition, we intend to continue to expand our business
in regions that represent growing markets for ethanol, including Phoenix,
Arizona, Las Vegas, Nevada and Portland, Oregon.

KINERGY SUPPLIERS

We do not presently engage in any ethanol production activities. However,
we are in the process of constructing an ethanol plant in Madera County for the
production of up to 35 million gallons of ethanol per year. We are a marketer
and reseller of ethanol throughout the Western United States. Accordingly, we
are dependent upon various producers of fuel grade ethanol for our ethanol
supplies. In addition, we provide ethanol transportation, storage and delivery
services through third-party service providers. We expect to market and sell
ethanol produced at PBI's ethanol production facility through Kinergy. An
existing marketing agreement between us and PBI will allow Kinergy to market and
sell all of the ethanol produced by PBI at its Goshen, California facility.

We assume risk of loss with respect to each shipment of ethanol once the
ethanol is delivered to us by our suppliers at the agreed upon delivery
location. We maintain this risk of loss until the ethanol is delivered to a fuel
terminal. In the event that our suppliers ship ethanol directly to our
customers, risk of loss passes directly from our suppliers to our customers and
we do not assume any risk of loss. We maintain insurance to cover the risks
associated with our activities.

We do not own or lease any rail cars, tanker trucks or other fuel
transportation vehicles. Instead, we contract with third-party providers to
receive ethanol at agreed upon locations from our suppliers and to store and/or
deliver the ethanol to agreed upon locations on behalf of our customers. These
contracts generally run from year-to-year, subject to termination by either
party upon advance written notice before the end of the then-current annual
term.

PEI CALIFORNIA CUSTOMERS

Upon completion of our ethanol plant in Madera County, we expect to market
and sell ethanol produced at this plant through Kinergy. Kinergy's business
focus has been on growing its market share at the Fresno fuel terminal, which is
the only wholesale distribution point for gasoline for over 200 miles between
Stockton and Bakersfield, California. The Fresno fuel terminal is only 20 miles
southeast of our Madera County site and approximately 35 miles northwest of our
potential Visalia site. The Fresno/Clovis metro area population is approximately
850,000. In addition, the Fresno fuel terminal serves the Central Valley, which
is one of the largest agricultural regions in the world. We are currently
supplying over 50% of the ethanol distributed out of the Fresno fuel terminal.
We expect that all of the ethanol generated by our Madera County facility will
be able to be sold locally in the Fresno market that Kinergy has developed,
capturing a key competitive advantage over Midwest ethanol producers who must
incur the costs of delivering ethanol from thousands of miles away and subject
their supplies to rail delays and other challenges.

The San Joaquin Valley of California (located in the southern half of the
Central Valley) has one of the highest concentrations of dairy cows in the
world, with over 1.4 million head of cattle in an area covering approximately
30,000 square miles. There are approximately 500,000 dairy cows within a 50-mile
radius of our production site in Madera County and within the same approximate
distance of our potential site in Visalia, for a combined total, excluding any
overlap, of over 750,000 dairy cows. We expect that our Madera County facility
as well as our potential facility in Visalia will be able to produce enough WDG
to feed 105,000 to 130,000 dairy cows each year.

We expect to be one of the few WDG producers with production facilities
located in California. We intend to position WDG as the protein feed of choice
based on its nutritional composition, consistency of quality and delivery, ease
of handling and its mixing ability with minerals and other feed ingredients. We
believe that WDG has an ideal moisture level to carry minerals and other feed
ingredients and we expect to capture a higher combined profit margin by
providing WDG to the feed market in California.

We also have a proposal from Airgas Dry Ice to purchase substantially all
the CO2 from our Madera County facility once construction is completed and
production of ethanol is commenced. The proposal also provides that Airgas Dry
Ice would lease land adjacent to the Madera County ethanol plant and capitalize
the costs of the CO2 recovery and processing plant.

PEI CALIFORNIA SUPPLIERS

The production of ethanol requires a significant amount of raw materials
and supplies, such as corn, natural gas, electricity and water. The cost of corn
is the most important variable cost associated with the production of ethanol. A
25 to 35 million gallon per year ethanol facility requires approximately 9.0 to
12.5 million bushels of corn each year or, according to the United States
Department of Agriculture--National Agricultural Statistics Survey, nearly 50%
of California's total 2004 annual corn production of approximately 26 million
bushels. Therefore, a California ethanol plant must be able to efficiently ship
corn from the Midwest via rail and then cheaply and reliably truck processed
ethanol to local markets. We believe that our grain receiving facility at our
Madera County site is one of the most efficient grain receiving facilities in
the United States. The unloading system was designed to unload 110 rail cars
consistently in less than fifteen hours. The plant will have the capacity to
store a 49-day supply of corn, or approximately 1.8 million bushels.

We plan to source corn using standard contracts, such as spot purchases,
forward purchases and basis contracts. We plan to establish a relationship with
a forwarding broker at the Chicago Board of Trade and expect to establish
allowable limits of open and un-hedged grain transactions that its merchants
will be required to follow pursuant to a risk management program. The limits
established are expected to be reviewed and adjusted on a regular basis.

CONSTRUCTION OF ETHANOL PLANT

PEI California, through Pacific Ethanol Madera, LLC, its wholly-owned
subsidiary, or PEI Madera, has entered into construction agreements with W. M.
Lyles Co. for the construction of an ethanol plant at our Madera County site.
Under the construction agreements, W. M. Lyles Co. has provided a guaranteed
maximum price, or GMP, of an aggregate of approximately $49.0 million. The GMP
sets a cap on total construction costs while providing for shared savings if the
actual cost falls below the GMP price. However, we are liable for additional
costs to the extent that the scope of work actually performed by W. M. Lyles Co.
exceeds the scope of work that is the basis for the GMP. In addition, the cost
of services performed directly by the engineer for the project, Delta-T
Corporation, is not included in the GMP. We estimate that the cost of services
performed directly by Delta-T Corporation and the cost of a related license fee
will total approximately $2.0 million. The construction agreements also provide
that if we terminate W. M. Lyles Co. in favor of another contractor, we will be
required to pay a termination fee of $5.0 million in addition to payment of all
costs incurred by W. M. Lyles Co. for services rendered through the date of
termination.

Through PEI California, we have entered into a letter agreement with W. M.
Lyles Co. that provides that, in the event that W. M. Lyles Co. pays performance
liquidated damages to PEI Madera as a result of a defect attributable Delta-T
Corporation, or in the event that W. M. Lyles Co. pays liquidated damages to PEI
Madera under our construction agreements as a result of a delay that is
attributable to Delta-T Corporation, then PEI California agrees to reimburse W.
M. Lyles Co. for such liquidated damages to the extent they exceed $2.0 million
and up to a maximum of $8.1 million. We are working to secure the financing
necessary to complete construction of this facility. See "Risk Factors."

Responsibility for the proper and timely construction of our initial
ethanol production facility in Madera County rests with W. M. Lyles Co. We are
requiring a payment and performance bond to guarantee the quality and the
timeliness of the construction of this facility. We have currently authorized W.
M. Lyles Co. to expend up to $15.0 million on site development work and we
expect to authorize W. M. Lyles Co. to spend the balance of $34.0 million of the
GMP once we secure the financing necessary to complete construction of this
facility.

Water supply is one of the most critical issues in developing a project in
the State of California. There is a pervasive water shortage in the Central
Valley, often causing spikes in the price of available water. We have taken a
number of steps to reduce our exposure to interruptions in our water supply and
to fluctuations in the market price of water. We have selected Delta-T
Corporation, a process design and technology provider, that we believe is
recognized in its industry for assisting in the minimization of water use. Also,
our Madera County property has one deep-water well with another deep-water well
scheduled for drilling, which together we believe will be able to supply nearly
twice the annual requirements of our proposed ethanol production facility.

COMPETITION

We operate in the highly-competitive ethanol marketing industry and plan to
construct ethanol production facilities to begin producing our own ethanol. The
largest ethanol producer in the United States is Archer-Daniels-Midland Company,
or ADM, with wet and dry mill plants in the Midwest and a total production
capacity of about 1.0 billion gallons per year, or about 30% of total United
States ethanol production. According to the Renewable Fuels Association, in its
May 2005 report entitled U.S. FUEL ETHANOL PRODUCTION CAPACITY, there are
approximately 100 ethanol plants currently operating or under construction
located primarily in the Midwest with a combined annual production capacity of
approximately 4.5 billion gallons. We believe that most of the growth in ethanol
production over the last ten years has been by farmer-owned cooperatives that
have commenced or expanded ethanol production as a strategy for enhancing demand
for corn and adding value through processing. We believe that many smaller
ethanol plants rely on marketing groups such as Ethanol Products, Aventine
Renewable Energy, Inc. and Renewable Products Marketing Group to move their
product to market. We believe that, because ethanol is a commodity, many of the
Midwest ethanol producers can target California, though ethanol producers
further west in states such as Nebraska and Kansas often enjoy delivery cost
advantages.

In March 2005, we agreed with PBI to market and sell PBI's entire ethanol
production from its facility in Goshen, California, which is approximately fifty
miles southeast of our Madera County site. PBI commenced ethanol production at
this facility in the fourth quarter of 2005 and we expect initial production to
be approximately 25 million gallons per year. The term of the agreement is two
years from the date that ethanol is first available for marketing from PBI's
production facility.

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

o OUR ETHANOL DISTRIBUTION NETWORK. We believe that we have a
competitive advantage due to the market niche that we have developed
by supplying ethanol to customers in areas and markets in the Western
United States that are not served by rail. We have developed an
ethanol distribution network for delivery of ethanol by truck to
virtually every significant fuel terminal as well as to numerous
smaller fuel terminals throughout California. Fuel terminals have
limited storage capacity and we have been successful in securing
storage tanks in California. In addition, we have an extensive network
of third-party delivery trucks available to deliver ethanol throughout
California.

o OUR CUSTOMER AND SUPPLIER RELATIONSHIPS. We have developed strong
business relationships with our customers and suppliers. In
particular, we have developed strong business relationships with major
and independent un-branded customers who collectively control the
majority of all gasoline sales in California. In addition, we have
developed strong business relationships with ethanol suppliers
throughout the Western and Midwestern United States.

Although we believe that Kinergy is in an advantageous position relative to
its competitors, Kinergy does have certain competitive vulnerabilities,
including the current limited supply of available ethanol, which may result in
Kinergy's inability to fully satisfy all of the demands of its customers,
resulting in customers seeking alternative supplies of ethanol, including
directly from ethanol producers such as ADM. In the event that customers
purchase ethanol from sources other than Kinergy, Kinergy's market share, sales
and profitability may decline. In addition, in the event that the price of
ethanol stabilizes at historically high levels, or continues to increase,
ethanol producers may seek to circumvent Kinergy's marketing and distribution
services in order to obtain additional profits that Kinergy may otherwise be
generating. Also, because ethanol competes with other alternative fuels,
Kinergy's focus on ethanol subjects it to the vulnerability that other
alternative fuels may offer advantages relative to ethanol or may, in the
future, be favored through governmental regulations and offer greater tax
incentives.

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

o OUR LOCATION IN CALIFORNIA. We believe that after the completion of
construction of an ethanol production plant, if it occurs, we will
have a competitive advantage in the Central Valley market for ethanol
because competing Midwest-sourced ethanol must be "double-handled" to
reach Central Valley distribution racks and Midwest ethanol producers
must incur the costs of delivering ethanol from hundreds of miles away
and subject their supplies to rail delays and other challenges. In
addition, the San Joaquin Valley has over 1.4 million head of dairy
cattle in an area less than 30,000 square miles, which we believe will
provide an excellent market for WDG, a co-product of ethanol and an
important protein source for dairy cows.

o OUR ETHANOL MARKETING DIVISION. Upon completion of our initial ethanol
production facility in Madera County, if it occurs, we expect to
market and sell ethanol produced at this facility through Kinergy. We
estimate that ethanol demand in the Central Valley was approximately
200 million gallons in 2004. Kinergy is currently purchasing and
reselling over 50% of the ethanol distributed out of the Fresno fuel
terminal. We expect that all or substantially all of the ethanol
generated by PBI's facility in Goshen and at our Madera County
facility will be able to be sold locally in the Fresno market that
Kinergy has developed.

Although we believe that our ethanol production business will be in an
advantageous position relative to our competitors, we do have certain
competitive vulnerabilities, including the fact that we are not yet producing
ethanol and will not have our initial production facility completed for at least
12 months. Because we are not presently in the ethanol production business,
unlike our competitors, and other than through certain activities of Kinergy, we
are not benefiting from sales of ethanol at the current, historically

unprecedented high price levels. Our inability to capture profits based on the
currently high price levels may provide our competitors, who are presently
producing ethanol, with greater relative advantages resulting from greater
capital resources available to these competitors. In addition, we have limited
experience in operating a modern ethanol production facility, such as the
facility planned for our Madera County site. Accordingly, our competitors may
have relative advantages over us unless and until we are able to develop the
expertise necessary to operate our planned ethanol production facilities at full
capacity and efficiency.

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

GOVERNMENTAL REGULATION

We and our existing and proposed business operations are subject to
extensive and frequently changing federal, state and local laws and regulations
relating to the protection of the environment. These laws, their underlying
regulatory requirements and the enforcement thereof, some of which are described
below, impact, or may impact, our existing and proposed business operations by
imposing:

o restrictions on our existing and proposed business operations and/or
the need to install enhanced or additional controls;
o the need to obtain and comply with permits and authorizations;
o liability for exceeding applicable permit limits or legal
requirements, in certain cases for the remediation of contaminated
soil and groundwater at our facilities, contiguous and adjacent
properties and other properties owned and/or operated by third
parties; and
o specifications for the ethanol we market and plan to produce.

In addition, some of the governmental regulations to which we are subject
are helpful to our ethanol marketing business and proposed ethanol production
business. The ethanol fuel industry is greatly dependent upon tax policies and
environmental regulations that favor the use of ethanol in motor fuel blends in
North America. Some of the governmental regulations applicable to our ethanol
marketing business and proposed ethanol production business are briefly
described below.

FEDERAL EXCISE TAX EXEMPTION

Ethanol blends have been either wholly or partially exempt from the federal
excise tax, or FET, on gasoline since 1978. The exemption has ranged from $0.04
to $0.06 per gallon of gasoline during that 25-year period. Current law provides
a $0.051 per gallon exemption from the $0.183 per gallon FET on gasoline if the
taxable product is blended in a mixture containing at least 10% ethanol. The FET
exemption was revised and its expiration date was extended for the sixth time
since its inception as part of the Jumpstart Our Business Strength, or JOBS, Act
enacted in October 2004. The new expiration date of the FET exemption is
December 31, 2010. We believe that it is highly likely that this tax incentive
will be extended beyond 2010 if Congress deems it necessary for the continued
growth and prosperity of the ethanol industry.

CLEAN AIR ACT AMENDMENTS OF 1990

In November 1990, a comprehensive amendment to the Clean Air Act of 1977
established a series of requirements and restrictions for gasoline content
designed to reduce air pollution in identified problem areas of the United
States. The two principal components affecting motor fuel content are the
Oxygenated Fuels Program, which is administered by states under federal
guidelines, and a federally supervised Reformulated Gasoline Program.

Oxygenated Fuels Program
------------------------

Federal law requires the sale of oxygenated fuels in certain carbon
monoxide non-attainment Metropolitan Statistical Areas, or MSA, during at least
four winter months, typically November through February. Any additional MSA not
in compliance for a period of two consecutive years in subsequent years may also
be included in the program. The EPA Administrator is afforded flexibility in
requiring a shorter or longer period of use depending upon available supplies of
oxygenated fuels or the level of non-attainment. This law currently affects the
Los Angeles area, where over 150 million gallons of ethanol are blended with
gasoline each winter.

Reformulated Gasoline Program
-----------------------------

The Clean Air Act Amendments of 1990 established special standards
effective January 1, 1995 for the most polluted ozone non-attainment areas: Los
Angeles Basin, Baltimore, Chicago Area, Houston Area, Milwaukee Area, New
York-New Jersey, Hartford Region, Philadelphia Area and San Diego, with
provisions to add other areas in the future if conditions warrant. California's
Central Valley was added in 2002. At the outset of the program there were a
total of 96 MSAs not in compliance with clean air standards for ozone, which
currently represents approximately 60% of the national market.

The legislation requires a minimum of 2.0% oxygen by weight in reformulated
gasoline as a means of reducing carbon monoxide pollution and replacing octane
lost by reducing aromatics which are high octane portions of refined oil. The
Reformulated Gasoline Program also includes a provision that allows individual
states to "opt into" the federal program by request of the governor, to adopt
standards promulgated by California that are stricter than federal standards, or
to offer alternative programs designed to reduce ozone levels. Nearly all of the
Northeast and middle Atlantic areas from Washington, D.C., to Boston not under
the federal mandate have "opted into" the federal standards.

These state mandates in recent years have created a variety of gasoline
grades to meet different regional environmental requirements. Reformulated
gasoline accounts for about 30% of nationwide gasoline consumption. Under
current law, California refiners must blend a minimum of 2.0% oxygen by weight.
This is the equivalent of 5.7% ethanol in every gallon of gas, or roughly 900
million gallons of ethanol per year in California alone.

NATIONAL ENERGY LEGISLATION

A national Energy Bill was signed into law in August 2005 by President
Bush. The Energy Bill substitutes the existing oxygenation program in the
Reformulated Gasoline Program with a national "renewable fuels standard." The
standard sets a minimum amount of renewable fuels that must be used by fuel
refiners. Beginning in 2006, the minimum amount of renewable fuels that must be
used by fuel refiners is 4.0 billion gallons, which increases progressively to
7.5 billion gallons in 2012. While we believe that the overall national market
for ethanol will grow, we believe that the market for ethanol in geographic
areas such as California could experience either increases or decreases in the
demand for ethanol depending on the preferences of petroleum refiners and state
policies. See "Risk Factors."

ADDITIONAL ENVIRONMENTAL REGULATIONS

In addition to the governmental regulations applicable to the ethanol
marketing and production industries described above, our business is subject to
additional federal, state and local environmental regulations, including
regulations established by the EPA, the California Air Quality Management
District, the San Joaquin Valley Air Pollution Control District and the
California Air Resources Board, or CARB. We cannot predict the manner or extent
to which these regulations will harm or help our business or the ethanol
production and marketing industry in general.

EMPLOYEES

As of November 21, 2005, we employed 17 persons on a full-time basis,
including through our subsidiaries. Our employees are highly skilled, and our
success will depend in part upon our ability to retain such employees and
attract new qualified employees who are in great demand. We have never had a
work stoppage or strike, and no employees are presently represented by a labor
union or covered by a collective bargaining agreement. We consider our relations
with our employees to be good.

FACILITIES

Our corporate headquarters, located in Fresno, California, consists of a
3,000 square foot office rented on a month-to-month basis. We also rent, on an
annual basis, an office in Davis, California, consisting of 500 square feet. In
addition, we rent, under a three-year lease, an office in Portland, Oregon,
consisting of 860 square feet.

We have acquired real property located in Madera County consisting of
approximately 137 acres on which we are constructing our first ethanol
production facility. We have an option to acquire additional real property
located in Visalia, California consisting of approximately 89 acres on which we
intend to construct another ethanol production facility. In addition, we have
secured an option to acquire an additional parcel of real property and an option
to lease two other parcels of real property on which we may construct additional
ethanol production facilities.

LEGAL PROCEEDINGS

We are subject to legal proceedings, claims and litigation arising in the
ordinary course of business. While the amounts claimed may be substantial, the
ultimate liability cannot presently be determined because of considerable
uncertainties that exist. Therefore, it is possible that the outcome of those
legal proceedings, claims and litigation could adversely affect our quarterly or
annual operating results or cash flows when resolved in a future period.
However, based on facts currently available, management believes such matters
will not adversely affect our financial position, results of operations or cash
flows.

GERALD ZUTLER

In January 2003, DriverShield CRM Corp., or DriverShield, then a
wholly-owned subsidiary of our predecessor, Accessity, was served with a
complaint filed by Mr. Gerald Zutler, its former President and Chief Operating
Officer, alleging, among other things, that DriverShield breached his employment
contract, that there was fraudulent concealment of DriverShield's intention to
terminate its employment agreement with Mr. Zutler, and discrimination on the
basis of age and aiding and abetting violation of the New York State Human
Rights Law. Mr. Zutler is seeking damages aggregating $3.0 million, plus
punitive damages and reasonable attorneys' fees. DriverShield's management
believes that DriverShield properly terminated Mr. Zutler's employment for
cause, and intends to vigorously defend this suit. An Answer to the complaint

was served by DriverShield on February 28, 2003. In 2003, Mr. Zutler filed a
motion to have DriverShield's attorney removed from the case. The motion was
granted by the court, but was subsequently overturned by an appellate court.
DriverShield has filed a claim with its insurance carrier under its directors
and officers and employment practices' liability policy. The carrier has agreed
to cover certain portions of the claim as they relate to Mr. Siegel,
DriverShield's former Chief Executive Officer. The policy has a $50,000
deductible and a liability limit of $3.0 million per policy year. At the present
time, the carrier has agreed to cover the portion of the claim that relates to
Mr. Siegel and has agreed to a fifty percent allocation of expenses.

MERCATOR GROUP, LLC

We filed a Demand for Arbitration against Presidion Solutions, Inc., or
Presidion, alleging that Presidion breached the terms of the Memorandum of
Understanding, or the MOU, between Accessity and Presidion dated January 17,
2003. We sought a break-up fee of $250,000 pursuant to the terms of the MOU
alleging that Presidion breached the MOU by wrongfully terminating the MOU.
Additionally, we sought out of pocket costs of its due diligence amounting to
approximately $37,000. Presidion filed a counterclaim against us alleging that
we had breached the MOU and therefore owe Presidion a break-up fee of $250,000.
The dispute was heard by a single arbitrator before the American Arbitration
Association in Broward County, Florida in late February 2004. During June 2004,
the arbitrator awarded us the $250,000 break-up fee set forth in the MOU between
us and Presidion, as well as our share of the costs of the arbitration and
interest from the date of the termination by Presidion of the MOU, aggregating
approximately $280,000. During the third quarter of 2004, Presidion paid us the
full amount of the award with accrued interest. The arbitrator dismissed
Presidion's counterclaim against us.

In 2003, we filed a lawsuit seeking damages in excess of $100 million as a
result of information obtained during the course of the arbitration discussed
above, against: (i) Presidion Corporation, f/k/a MediaBus Networks, Inc.,
Presidion's parent corporation, (ii) Presidion's investment bankers, Mercator
Group, LLC, or Mercator, and various related and affiliated parties and (iii)
Taurus Global LLC, or Taurus, (collectively referred to as the "Mercator
Action"), alleging that these parties committed a number of wrongful acts,
including, but not limited to tortuously interfering in the transaction between
us and Presidion. In 2004, we dismissed this lawsuit without prejudice, which
was filed in Florida state court. We recently refiled this action in the State
of California, for a similar amount, as we believe this to be the proper
jurisdiction. On August 18, 2005, the court stayed the action and ordered the
parties to arbitration. The parties have agreed to mediate the matter. Mediation
is scheduled to take place on December 9, 2005. The final outcome of the
Mercator Action will most likely take an indefinite time to resolve. We
currently have limited information regarding the financial condition of the
defendants and the extent of their insurance coverage. Therefore, it is possible
that we may prevail, but may not be able to collect any judgment. The share
exchange agreement relating to the Share Exchange Transaction provides that
following full and final settlement or other final resolution of the Mercator
Action, after deduction of all fees and expenses incurred by the law firm
representing us in this action and payment of the 25% contingency fee to the law
firm, shareholders of record of Accessity on the date immediately preceding the
closing date of the Share Exchange Transaction will receive two-thirds and we
will retain the remaining one-third of the net proceeds from any Mercator Action
recovery.

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The names, ages and positions held by our directors and executive officers
as of November 21, 2005 are as follows:

NAME AGE POSITIONS HELD
---- --- --------------

William L. Jones.............. 55 Chairman of the Board and Director

Neil M. Koehler............... 47 Chief Executive Officer, President
and Director

Ryan W. Turner................ 31 Chief Operating Officer and Secretary

William G. Langley............ 56 Chief Financial Officer

Frank P. Greinke.............. 51 Director

Charles W. Bader.............. 65 Director

John L. Prince (2)............ 62 Director

Terry L. Stone (1)............ 56 Director

Kenneth J. Friedman (1)....... 52 Director

-----------
(1) Member of the audit, nominating and governance, and compensation committees.
(2) Member of the audit committee.

WILLIAM L. JONES has served as Chairman of the Board and as a director
since March 2005. Mr. Jones is a co-founder of PEI California and served as
Chairman of the Board of PEI California since its formation in January 2003
through March 2004, when he stepped off the board of PEI California to focus on
his candidacy for one of California's United States Senate seats. Mr. Jones was
California's Secretary of State from 1995 to 2003. Since May 2002, Mr. Jones has
also been the owner of Tri-J Land & Cattle, a diversified farming and cattle
company in Fresno County, California. Mr. Jones has a B.A. degree in
Agribusiness and Plant Sciences from California State University, Fresno.

NEIL M. KOEHLER has served as Chief Executive Officer, President and as a
director since March 2005. Mr. Koehler served as Chief Executive Officer of PEI
California since its formation in January 2003 and as Chairman of the Board
since March 2004. Prior to his association with PEI California, Mr. Koehler was
the co-founder and General Manager of Parallel Products, one of the first
ethanol production facilities in California (and one of only two currently
existing ethanol production facilities in California), which was sold to a
public company in 1997. Mr. Koehler was also the sole manager and sole limited
liability company member of Kinergy, which he founded in September 2000. Mr.
Koehler has over 20 years of experience in the ethanol production, sales and
marketing industry in the Western United States. Mr. Koehler is the Director of
the California Renewable Fuels Partnership and a speaker on the issue of
renewable fuels and ethanol production in California. Mr. Koehler has a B.A.
degree in Government, from Pomona College.

RYAN W. TURNER has served as Chief Operating Officer and Secretary since
March 2005 and served as a director from March 2005 until July 2005. Mr. Turner
is a co-founder of PEI California and served as its Chief Operating Officer and
Secretary and as a director and led the business development efforts of PEI

California since its inception in January 2003. Prior to co-founding and joining
PEI California, Mr. Turner served as Chief Operating Officer of Bio-Ag, LLC from
March 2002 until January 2003. Prior to joining Bio-Ag, LLC, Mr. Turner served
as General Manager of J & J Farms, a large-scale, diversified agriculture
operation on the west side of Fresno County, California from June 1997 to March
2002, where he guided the production of corn, cotton, tomatoes, melons, alfalfa
and asparagus crops and operated a custom beef lot. Mr. Turner has a B.A. degree
in Public Policy from Stanford University, an M.B.A. from Fresno State
University and was a member of Class XXIX of the California Agricultural
Leadership Program.

WILLIAM G. LANGLEY has served as Chief Financial Officer since April 2005.
Mr. Langley has been a partner in Tatum CFO Partners, LLP ("Tatum"), a national
partnership of more than 350 professional highly-experienced chief financial
officers, since November 2002. During this time, Mr. Langley has acted as the
full-time Chief Financial Officer for Ensequence, Inc., an inter-active
television software company, Norton Motorsports, Inc., a motorcycle
manufacturing and marketing company and Auctionpay, Inc., a software and
fundraising management company. From 2001 to 2002, Mr. Langley served as the
President, Chief Financial Officer and Chief Operating Officer for Laservia
Company, which specializes in advanced laser system technology. From 2000 to
2001, Mr. Langley acted as the Chief Financial Officer of Rulespace, Inc., a
developer of artificial intelligence software. Mr. Langley has prior public
company experience, is licensed both as an attorney and C.P.A. and will remain a
partner in Tatum during his employment with Pacific Ethanol. Mr. Langley has a
B.A. degree in accounting and political science from Albertson College, a J.D.
degree from Lewis & Clark School of Law and an LL.M. degree from the New York
University School of Law.

FRANK P. GREINKE has served as a director since March 2005. Mr. Greinke
served as a director of PEI California commencing in October 2003. Mr. Greinke
is currently, and has been for at least the past five years, the CEO and sole
owner of SC Fuels, Inc., a petroleum distributor. Mr. Greinke is also a director
of the Society of Independent Gasoline Marketers of America, the Chairman of the
Southern California Chapter of the Young Presidents Organization and serves on
the Board of Directors of The Bank of Hemet and on the Advisory Board of Solis
Capital Partners, Inc.

CHARLES W. BADER has served as a director since July 2005. Mr. Bader has
been a lobbyist to the California State government, specializing in education
and municipal government, since 1993. Prior to that time, Mr. Bader served for
eight years as a member of the California State Assembly from 1982 to 1990. Mr.
Bader is a former business owner and a former elected Mayor and Councilman for
the City of Pomona, California. Mr. Bader owned and served as the President of
Condominium Management Services, a condominium management services company, from
1973 to 1992. Mr. Bader was Mayor of the City of Pomona from 1977 to 1981, and
prior to that time, was a city Councilman for the City of Pomona from 1971 to
1977. Mr. Bader has a B.S. degree in Business Administration from the University
of California, Los Angeles.

JOHN L. PRINCE has served as a director since July 2005. Mr. Prince is
retired but also works as a consultant to Land O' Lakes, Inc. and other
companies. Mr. Prince was an Executive Vice President with Land O' Lakes, Inc.
from July 1998 until his retirement in 2004. Prior to that time, Mr. Prince was
President and Chief Executive Officer of Dairyman's Cooperative Creamery
Association, or the DCCA, located in Tulare, California, until its merger with
Land O' Lakes, Inc. in July 1998. Land O' Lakes, Inc. is a farmer-owned,
national branded organization based in Minnesota with annual sales in excess of
$6 billion and membership and operations in over 30 states. Prior to joining the
DCCA, Mr. Prince was President and Chief Executive Officer for nine years until
1994, and was Operations Manager for the preceding ten years commencing in 1975,
of the Alto Dairy Cooperative in Waupun, Wisconsin. Mr. Prince has a B.A. degree
in Business Administration from the University of Northern Iowa.

TERRY L. STONE has served as a director since March 2005. Mr. Stone is a
Certified Public Accountant with over thirty years of experience in accounting
and taxation. He has been the owner of his own accountancy firm since 1990. Mr.
Stone has experience in accounting and taxation in a wide range of industries,
including agriculture, manufacturing, retail, equipment leasing, professionals
and not-for-profit organizations. Mr. Stone served as a part-time instructor at
California State University, Fresno at various times throughout the 1990s and
taught classes in taxation, auditing, and financial and management accounting.
Mr. Stone also has various professional certifications in addition to his
Certified Public Accountant certification, including Series 7 and 66 NASD
securities licenses. Mr. Stone has a B.S. in Accounting from California State
University, Fresno.

KENNETH J. FRIEDMAN has served as a director since March 2005. Mr. Friedman
was a director of Accessity Corp., our predecessor, since October 1998. Mr.
Friedman has for more than five years served as President of the Primary Group,
Inc., an executive search consultancy firm.

Our business, property and affairs are managed under the direction of our
board of directors. Our directors are kept informed of our business through
discussions with our executive officers, by reviewing materials provided to them
and by participating in meetings of our board of directors and its committees.
During 2004, our board of directors held two meetings attended by members of the
board of directors either in person or via telephone, and on six occasions
approved resolutions by unanimous written consent in lieu of a meeting.

Our officers are appointed by and serve at the discretion of our board of
directors. There are no family relationships among our executive officers and
directors, except that William L. Jones is the father-in-law of Ryan W. Turner.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended ("Exchange
Act"), requires our executive officers and directors, and persons who
beneficially own more than 10% of a registered class of our common stock, to
file initial reports of ownership and reports of changes in ownership with the
Securities and Exchange Commission ("Commission"). These officers, directors and
stockholders are required by the Commission regulations to furnish us with
copies of all reports that they file.

Based solely upon a review of copies of the reports furnished to us during
the year ended December 31, 2004 and thereafter, or any written representations
received by us from directors, officers and beneficial owners of more than 10%
of our common stock ("reporting persons") that no other reports were required,
we believe that, during 2004, all Section 16(a) filing requirements applicable
to our reporting persons were met.

CODES OF ETHICS

Our board of directors has adopted a Code of Business Conduct and Ethics
that applies to all of our directors, officers and employees and an additional
Code of Business Ethics that applies to our Chief Executive Officer and senior
financial officers.

We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K
relating to amendments to or waivers from provisions of these codes that relate
to one or more of the items set forth in Item 406(b) of Regulation S-K, by
describing on our Internet website, located at http://www.pacificethanol.net,
within four business days following the date of a waiver or a substantive
amendment, the date of the waiver or amendment, the nature of the amendment or
waiver, and the name of the person to whom the waiver was granted.

Information on our Internet website is not, and shall not be deemed to be,
a part of this prospectus or incorporated into any other filings we make with
the Commission.

COMPENSATION OF EXECUTIVE OFFICERS

The following table shows for the fiscal years ended December 31, 2004,
2003 and 2002, compensation awarded or paid to, or earned by, our former Chief
Executive Officer and each of our other most highly compensated former executive
officers who earned more than $100,000 in salary for the year ended December 31,
2004, or the Named Executive Officers. Each of Messrs. Siegel and Kart resigned
their positions in connection with the Share Exchange Transaction that was
consummated on March 23, 2005 and Mr. Delisi resigned his position prior to that
time. Accordingly, none of the information set forth below relates to any of our
current executive officers. See "Management - Directors and Executive Officers"
for a list of our current executive officers, "Management - Employment Contracts
and Termination of Employment and Change-in-Control Arrangements" and "Certain
Relationships and Related Transactions" for a description of the compensation
arrangements we have with these executive officers.

SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------- ----------------
SECURITIES ALL OTHER
UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS OPTIONS/SARS (#) ($)
--------------------------- ---- ---------- ----- ---------------- ------------

Barry Siegel ............................... 2004 300,000 -- -- --
Former Chairman of the Board, President 2003 300,000 -- -- --
and Chief Executive Officer 2002 300,000 250,000 110,000 12,500(1)

Philip B. Kart ............................. 2004 155,000 -- -- --
Former Senior Vice President, Secretary, 2003 155,000 10,000 -- 62,000(2)
Treasurer and Chief Financial Officer 2002 155,000 -- 30,000 --

Steven DeLisi .............................. 2004 175,000 -- -- --
Former President, Sentaur Corp. 2003 175,000 10,000 -- --
2002 68,654 5,000 50,000 --

--------------
(1) Reimbursed to Mr. Siegel for direct costs he incurred in connection with his
relocation.
(2) Provided to Mr. Kart, upon his relocation, for costs incurred in connection
with his relocation.

STOCK OPTION GRANTS AND EXERCISES

We made no awards of stock options during the last fiscal year to the
Named Executive Officers as part of their employment. The following table
indicates the number of exercised and unexercised stock options held by each
Named Executive Officer as of December 31, 2004.

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES

NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES VALUE UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS
ACQUIRED ON REALIZED OPTIONS/SARS AT FY-END (#) AT FY-END ($)
NAME EXERCISE (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------ -------- -------------------------- -------------------------

Barry Siegel.............. -- -- 80,000/36,667 0/0
Philip B. Kart............ -- -- 65,000/10,000 $197,438/0
Steven DeLisi............. -- -- 33,333/16,667 0/0

EQUITY COMPENSATION PLAN INFORMATION

SHARES TO BE
ISSUED UPON EXERCISE OF
OUTSTANDING, NUMBER OF
OPTIONS, WARRANTS WEIGHTED AVERAGE SECURITIES AVAILABLE
PLAN CATEGORY OR STOCK RIGHTS (#) EXERCISE PRICE ($) FOR FUTURE ISSUANCE
------------- ------------------- ------------------ -------------------

APPROVED BY SHAREHOLDERS:
1995 Plan................................ 377,667 $5.98 822,333
2004 Plan................................ -- -- 2,500,000

NOT APPROVED BY SHAREHOLDERS:
Consultant's Warrants ................... 25,000 $2.99 --

LONG-TERM INCENTIVE PLAN AWARDS

In fiscal 2004, no awards were given to the Named Executive Officers under
long-term incentive plans.

REPORT ON REPRICING OF OPTIONS AND SARS

No adjustments to or amendments of the exercise price of stock options or
stock appreciation rights previously awarded to the Named Executive Officers
occurred in fiscal 2004.

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS

EXECUTIVE EMPLOYMENT AGREEMENTS DATED MARCH 23, 2005 WITH EACH OF NEIL M.
KOEHLER AND RYAN W. TURNER

The Executive Employment Agreement with Neil M. Koehler provides for a
three-year term and automatic one-year renewals thereafter, unless either the
employee or Pacific Ethanol provides written notice to the other at least 90
days prior to the expiration of the then-current term. The Executive Employment
Agreement with Ryan W. Turner provides for a one-year term and automatic
one-year renewals thereafter, unless either the employee or Pacific Ethanol
provides written notice to the other at least 90 days prior to the expiration of
the then-current term.

Neil M. Koehler is to receive a base salary of $200,000 per year and is
entitled to receive a cash bonus not to exceed 50% of his base salary to be paid
based upon performance criteria set by the board on an annual basis and an
additional cash bonus not to exceed 50% of the net free cash flow (defined as
revenues of Kinergy, less his salary and performance bonus, less capital
expenditures and all expenses incurred specific to Kinergy), subject to a
maximum of $300,000 in any given year; provided that such bonus will be reduced
by ten percentage points each year, such that 2009 will be the final year of
such bonus at 10% of net free cash flow.

Ryan W. Turner is to receive a base salary of $125,000 per year and is
entitled to receive a cash bonus not to exceed 50% of his base salary to be paid
based upon performance criteria set by the board on an annual basis. Effective
as of October 1, 2005, the compensation committee of our board of directors
increased Mr. Turner's base salary to $175,000 per year.

We are also required to provide an office and administrative support to
each of Messrs. Koehler and Turner and certain benefits, including medical
insurance (or, if inadequate due to location of permanent residence,
reimbursement of up to $1,000 per month for obtaining health insurance
coverage), three weeks of paid vacation per year, participation in the stock
option plan to be developed in relative proportion to the position in the
organization, and participation in benefit plans on the same basis and to the
same extent as other executives or employees.

Each of Messrs. Koehler and Turner are also entitled to reimbursement for
all reasonable business expenses incurred in promoting or on behalf of the
business of Pacific Ethanol, including expenditures for entertainment, gifts and
travel. Upon termination or resignation for any reason, the terminated employee
is entitled to receive severance equal to three months of base salary during the
first year after termination or resignation and six months of base salary during
the second year after termination unless he is terminated for cause or
voluntarily terminates his employment without providing the required written
notice. If the employee is terminated (other than for cause) or terminates for
good reason following, or within the 90 days preceding, any change in control,
in lieu of further salary payments to the employee, we may elect to pay a lump
sum severance payment equal to the amount of his annual base salary.

The term "for good reason" is defined in each of the Executive Employment
Agreements as (i) a general assignment by us for the benefit of creditors or
filing by us of a voluntary bankruptcy petition or the filing against us of any
involuntary bankruptcy which remains undismissed for 30 days or more or if a
trustee, receiver or liquidator is appointed, (ii) any material changes in the
employee's titles, duties or responsibilities without his express written
consent, or (iii) the employee is not paid the compensation and benefits
required under the Employment Agreement.

The term "for cause" is defined in each of the Executive Employment
Agreements as (i) any intentional misapplication by the employee of Pacific
Ethanol funds or other material assets, or any other act of dishonesty injurious
to Pacific Ethanol committed by the employee; or (ii) the employee's conviction
of (a) a felony or (b) a crime involving moral turpitude; or (iii) the
employee's use or possession of any controlled substance or chronic abuse of
alcoholic beverages, which use or possession the board reasonably determines
renders the employee unfit to serve in his capacity as a senior executive of
Pacific Ethanol; or (iv) the employee's breach, nonperformance or nonobservance
of any of the terms of his employment agreement with us, including but not
limited to the employee's failure to adequately perform his duties or comply
with the reasonable directions of the board; but notwithstanding anything in the
foregoing subsections (iii) or (iv) to the contrary, we shall not terminate the
employee unless the board first provides the employee with a written memorandum
describing in detail how his performance thereunder is not satisfactory and the
employee is given a reasonable period of time (not less than 30 days) to remedy
the unsatisfactory performance related by the board to the employee in that
memorandum. A determination of whether the employee has satisfactorily remedied
the unsatisfactory performance shall be promptly made by a majority of the
disinterested directors of the board (or the entire board, but not including the
employee, if there are no disinterested directors) at the end of the period
provided to the employee for remedy, and the board's determination shall be
final.

A "change in control" of Pacific Ethanol is deemed to have occurred if, in
a single transaction or series of related transactions: (i) any person (as such
term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934
("Exchange Act")), other than a trustee or fiduciary holding securities under an
employment benefit program is or becomes a "beneficial owner" (as defined in
Rule 13-3 under the Exchange Act), directly or indirectly of securities of
Pacific Ethanol representing 51% or more of the combined voting power of Pacific
Ethanol, (ii) there is a merger (other than a reincorporation merger) or
consolidation in which Pacific Ethanol does not survive as an independent
company, or (iii) the business of Pacific Ethanol is disposed of pursuant to a
sale of assets.

EXECUTIVE EMPLOYMENT AGREEMENT DATED AUGUST 10, 2005 WITH WILLIAM G. LANGLEY

The Executive Employment Agreement with William G. Langley provides for a
four-year term and automatic one-year renewals thereafter, unless either the
employee or Pacific Ethanol provides written notice to the other at least 90
days prior to the expiration of the then-current term. Mr. Langley is to receive

a base salary of $185,000 per year. All other terms and conditions of Mr.
Langley's Executive Employment Agreement are substantially the same as those
contained in Mr. Turner's Executive Employment Agreement, except that Mr.
Langley is entitled to six months of severance pay during the entire term of his
agreement and is also entitled to reimbursement of his costs associated with his
relocation to Fresno, California. Mr. Langley is obligated to relocate to
Fresno, California within six months of the date of his Executive Employment
Agreement.

BOARD COMMITTEES

Our board of directors currently has an audit committee, a compensation
committee and a nominating and governance committee. Our board of directors has
determined that Terry L. Stone, Kenneth J. Friedman and John L. Prince, each of
whom is a member of one or more of these committees, are "independent" as
defined in NASD Marketplace Rule 4200(a)(15) and that Messrs. Stone, Friedman
and Prince meet the other criteria contained in NASD Marketplace Rule 4350
relating to audit committee members.

The audit committee selects our independent auditors, reviews the results
and scope of the audit and other services provided by our independent auditors,
and reviews our financial statements for each interim period and for our year
end. This committee consists of Messrs. Stone, Friedman and Prince. The audit
committee operates pursuant to a charter approved by our board of directors and
our audit committee. Our board of directors has determined that Mr. Stone is an
"audit committee financial expert."

The compensation committee is responsible for establishing and
administering our policies involving the compensation of all of our executive
officers and establishing and recommending to our board of directors the terms
and conditions of all employee and consultant compensation and benefit plans.
Our entire board of directors also may perform these functions with respect to
our employee stock option plans. Since March 23, 2005, this committee has
consisted of Messrs. Stone and Friedman. The compensation committee operates
pursuant to a charter approved by our board of directors and compensation
committee.

The nominating committee selects nominees for the board of directors. Since
March 23, 2005, the nominating and governance committee has consisted of Messrs.
Stone and Friedman. The nominating and governance committee utilizes a variety
of methods for identifying and evaluating nominees for director. Candidates may
also come to the attention of the nominating and governance committee through
current board members, professional search firms and other persons. The
nominating and governance committee operates pursuant to a charter approved by
our board of directors and our nominating and governance committee.

During the fiscal year ended December 31, 2004, all directors attended at
least 75% of the aggregate of the meetings of the board of directors and of the
committees on which they served, or that were held during the period they were
directors or committee members.

COMPENSATION OF DIRECTORS

The Chairman of our board of directors receives annual compensation of
$80,000. Each member of our board of directors, including the Chairman, receives
$1,500 for each board meeting attended, whether attended in person or
telephonically. The Chairman of our audit committee receives an additional
$3,500 per quarterly period. In addition, non-employee directors are reimbursed
for certain reasonable and documented expenses in connection with attendance at
meetings of our board of directors and committees.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

No member of the board of directors has a relationship that would
constitute an interlocking relationship with executive officers and directors of
another entity.

STOCK OPTION PLANS

We currently have two stock option plans: an Amended 1995 Incentive Stock
Plan and a 2004 Stock Option Plan. These plans are administered by our
compensation committee, which currently consists of Messrs. Stone and Friedman.

The Amended 1995 Incentive Stock Plan authorizes the issuance of incentive
stock options, commonly known as ISOs, and non-qualified stock options, commonly
known as NQOs, to our employees, directors or consultants for the purchase of up
to 1,200,000 shares of our common stock. The Amended 1995 Incentive Stock Plan
terminates in 2005. As of November 21, 2005, options to purchase up to 105,000
shares of common stock were outstanding under the Amended 1995 Incentive Stock
Plan. Our board of directors does not intend to issue any additional options
under the Amended 1995 Incentive Stock Plan.

The 2004 Stock Option Plan authorizes the issuance of ISOs and NQOs to our
officers, directors or key employees or to consultants that do business with
Pacific Ethanol for up to an aggregate of 2,500,000 shares of common stock. The
2004 Stock Option Plan terminates on May 14, 2014. Our board of directors'
adoption of the 2004 Stock Option Plan was ratified by our stockholders at our
2004 annual meeting of stockholders that was initially convened on December 28,
2004, adjourned to February 1, 2004 and further adjourned to and completed on
February 28, 2005.

As of November 21, 2005, we had approximately 17 employees and officers and
6 non-employee directors eligible to receive options under the 2004 Stock Option
Plan. As of that date, options to purchase up to 822,500 shares of common stock
were outstanding under the 2004 Stock Option Plan and 1,677,500 shares remained
available for grants under this plan. The following is a description of some of
the key terms of the 2004 Stock Option Plan.

SHARES SUBJECT TO THE 2004 STOCK OPTION PLAN

A total of 2,500,000 shares of our common stock are authorized for issuance
under the 2004 Stock Option Plan. Any shares of common stock that are subject to
an award but are not used because the terms and conditions of the award are not
met, or any shares that are used by participants to pay all or part of the
purchase price of any option, may again be used for awards under the 2004 Stock
Option Plan.

ADMINISTRATION

It is the intent of the 2004 Stock Option Plan that it be administered in a
manner such that option grants and exercises would be "exempt" under Rule 16b-3
of the Exchange Act. The compensation committee is empowered to select those
eligible persons to whom options shall be granted under the 2004 Stock Option
Plan; to determine the time or times at which each option shall be granted,
whether options will be ISOs or NQOs and the number of shares to be subject to
each option; and to fix the time and manner in which each option may be
exercised, including the exercise price and option period, and other terms and
conditions of options, all subject to the terms and conditions of the 2004 Stock

Option Plan. The compensation committee has sole discretion to interpret and
administer the 2004 Stock Option Plan, and its decisions regarding the 2004
Stock Option Plan are final, except that our board of directors can act in place
of the compensation committee as the administrator of the 2004 Stock Option Plan
at any time or from time to time, in its discretion.

OPTION TERMS

ISOs granted under the 2004 Stock Option Plan must have an exercise price
of not less than 100% of the fair market value of a share of common stock on the
date the ISO is granted and must be exercised, if at all, within ten years from
the date of grant. In the case of an ISO granted to an optionee who owns more
than 10% of the total voting securities of Pacific Ethanol on the date of grant,
the exercise price may be not less than 110% of fair market value on the date of
grant, and the option period may not exceed five years. NQOs granted under the
2004 Stock Option Plan must have an exercise price of not less than 85% of the
fair market value of a share of common stock on the date the NQO is granted.

Options may be exercised during a period of time fixed by the committee
except that no option may be exercised more than ten years after the date of
grant. In the discretion of the committee, payment of the purchase price for the
shares of stock acquired through the exercise of an option may be made in cash,
shares of our common stock or a combination of cash and shares of our common
stock.

AMENDMENT AND TERMINATION

The 2004 Stock Option Plan may be wholly or partially amended or otherwise
modified, suspended or terminated at any time and from time to time by our board
of directors. However, our board of directors may not materially impair any
outstanding options without the express consent of the optionee or materially
increase the number of shares subject to the 2004 Stock Option Plan, materially
increase the benefits to optionees under the 2004 Stock Option Plan, materially
modify the requirements as to eligibility to participate in the 2004 Stock
Option Plan or alter the method of determining the option exercise price without
stockholder approval. No option may be granted under the 2004 Stock Option Plan
after May 14, 2014.

FEDERAL INCOME TAX CONSEQUENCES

NQOS. Holders of NQOs do not realize income as a result of a grant or
vesting of an option in the event that the stock option is granted at an
exercise price at or above the fair market value of the underlying shares of our
stock on the date of grant, but realize compensation income upon exercise of an
NQO to the extent that the fair market value of the shares of common stock on
the date of exercise of the NQO exceeds the exercise price paid. We will be
required to withhold taxes on ordinary income realized by an optionee upon the
exercise of an NQO.

In the event of the grant of an NQO with a per share exercise price that is
less than the fair market value per share of our underlying common stock on the
date of grant, the grant is treated as deferred compensation. Except in certain
limited circumstances, such a grant results in ordinary income, to the same
extent applicable to an option grant with an exercise price at or above fair
market value, realized by the optionee at vesting of the option, as opposed to
upon its exercise, plus as an additional tax of 20% payable by the optionee.

In the case of an optionee subject to the "short-swing" profit recapture
provisions of Section 16(b) of the Exchange Act, the optionee realizes income
only upon the lapse of the six-month period under Section 16(b), unless the
optionee elects to recognize income immediately upon exercise of his or her
option.

ISOS. Holders of ISOs will not be considered to have received taxable
income upon either the grant of the option or its exercise. Upon the sale or
other taxable disposition of the shares, long-term capital gain will normally be
recognized on the full amount of the difference between the amount realized and
the option exercise price paid if no disposition of the shares has taken place
within either two years from the date of grant of the option or one year from
the date of transfer of the shares to the optionee upon exercise. If the shares
are sold or otherwise disposed of before the end of the one-year or two-year
periods, the holder of the ISO must include the gain realized as ordinary income
to the extent of the lesser of the fair market value of the option stock minus
the option price, or the amount realized minus the option price. Any gain in
excess of these amounts, presumably, will be treated as capital gain. We will be
entitled to a tax deduction in regard to an ISO only to the extent the optionee
has ordinary income upon the sale or other disposition of the option shares.

Upon the exercise of an ISO, the amount by which the fair market value of
the purchased shares at the time of exercise exceeds the option price will be an
"item of tax preference" for purposes of computing the optionee's alternative
minimum tax for the year of exercise. If the shares so acquired are disposed of
prior to the expiration of the one-year or two-year periods described above,
there should be no "item of tax preference" arising from the option exercise.

POSSIBLE ANTI-TAKEOVER EFFECTS

Although not intended as an anti-takeover measure by our board of
directors, one of the possible effects of the 2004 Stock Option Plan could be to
place additional shares, and to increase the percentage of the total number of
shares outstanding, in the hands of the directors and officers of Pacific
Ethanol. Those persons may be viewed as part of, or friendly to, incumbent
management and may, therefore, under some circumstances be expected to make
investment and voting decisions in response to a hostile takeover attempt that
may serve to discourage or render more difficult the accomplishment of the
attempt.

In addition, options may, in the discretion of the committee, contain a
provision providing for the acceleration of the exercisability of outstanding,
but unexercisable, installments upon the first public announcement of a tender
offer, merger, consolidation, sale of all or substantially all of our assets, or
other attempted changes in the control of Pacific Ethanol. In the opinion of our
board of directors, this acceleration provision merely ensures that optionees
under the 2004 Stock Option Plan will be able to exercise their options as
intended by the board of directors and stockholders prior to any extraordinary
corporate transaction which might serve to limit or restrict that right. Our
board of directors is, however, presently unaware of any threat of hostile
takeover involving Pacific Ethanol.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law permits a corporation
to indemnify its directors and officers against expenses, judgments, fines and
amounts paid in settlement actually and reasonably incurred in connection with a
pending or completed action, suit or proceeding if the officer or director acted
in good faith and in a manner the officer or director reasonably believed to be
in the best interests of the corporation.

Our certificate of incorporation provides that, except in certain specified
instances, our directors shall not be personally liable to us or our
stockholders for monetary damages for breach of their fiduciary duty as
directors, except liability for the following:

o any breach of their duty of loyalty to our company or our
stockholders;
o acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;

o unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; and
o any transaction from which the director derived an improper personal
benefit.

In addition, our certificate of incorporation and bylaws obligate us to
indemnify our directors and officers against expenses and other amounts
reasonably incurred in connection with any proceeding arising from the fact that
such person is or was an agent of ours. Our bylaws also authorize us to purchase
and maintain insurance on behalf of any of our directors or officers against any
liability asserted against that person in that capacity, whether or not we would
have the power to indemnify that person under the provisions of the Delaware
General Corporation Law. We have entered and expect to continue to enter into
agreements to indemnify our directors and officers as determined by our board of
directors. These agreements provide for indemnification of related expenses
including attorneys' fees, judgments, fines and settlement amounts incurred by
any of these individuals in any action or proceeding. We believe that these
bylaw provisions and indemnification agreements are necessary to attract any
retain qualified persons as directors and officers. We also maintain directors'
and officers' liability insurance.

The limitation of liability and indemnification provisions in our
certificate of incorporation and bylaws may discourage stockholders from
bringing a lawsuit against our directors for breach of their fiduciary duty.
They may also reduce the likelihood of derivative litigation against our
directors and officers, even though an action, if successful, might benefit us
and other stockholders. Furthermore, a stockholder's investment may be adversely
affected to the extent that we pay the costs of settlement and damage awards
against directors and officers as required by these indemnification provisions.
At present, there is no pending litigation or proceeding involving any of our
directors, officers or employees regarding which indemnification is sought, and
we are not aware of any threatened litigation that may result in claims for
indemnification.

Insofar as the provisions of our certificate of incorporation or bylaws
provide for indemnification of directors or officers for liabilities arising
under the Securities Act of 1933, as amended, or the Securities Act, we have
been informed that in the opinion of the Commission this indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

TRANSACTIONS BETWEEN ACCESSITY AND ITS RELATED PARTIES PRIOR
TO THE SHARE EXCHANGE TRANSACTION

We were a party to an Employment Agreement with Barry Siegel, our former
Chairman of the Board, President and Chief Executive Officer, that commenced on
January 1, 2002, and initially expired on December 31, 2004 and which expiration
date, under the amendment referenced above, was extended to December 31, 2007.
Mr. Siegel's annual salary was $300,000, and was granted stock options, under
our Amended 1995 Incentive Stock Plan, to purchase 60,000 shares of our common
stock, in addition to certain other perquisites. The Employment Agreement
provided that following a change of control, which included the Share Exchange
Transaction, we would be required to pay Mr. Siegel (i) a severance payment of
300% of his average annual salary for the past five years, less $100, (ii) the
cash value of his outstanding but unexercised stock options, and (iii) other
perquisites should he be terminated for various reasons specified in the
agreement. The agreement specified that in no event would any severance payments
exceed the amount we could deduct under the provisions of the Internal Revenue
Code. In recognition of the sale of one of our divisions, Mr. Siegel was also
awarded a $250,000 bonus, which was paid in February 2002, and an additional
grant of options to purchase 50,000 shares of our common stock. In connection
with the Share Exchange Transaction and the Confidentiality, Non-Competition,
Non-Solicitation and Consulting Agreement dated March 23, 2005 between us and
Mr. Siegel, Mr. Siegel's Employment Agreement was terminated and he waived the
payments that otherwise would have been due to him under the change of control
provisions of his Employment Agreement.

We were a party to an Employment Agreement with Philip B. Kart, our former
Senior Vice President, Secretary, Treasurer and Chief Financial Officer, that
commenced on January 1, 2002, and initially expired on January 1, 2004 and which
expiration date, under the amendments referenced above, was extended first to
December 31, 2004 and subsequently to December 31, 2005. Mr. Kart's annual
salary was $155,000 per annum and he was granted stock options, under our
Amended 1995 Incentive Stock Plan, providing the right to purchase 30,000 shares
of the our common stock, in addition to certain other perquisites. The
Employment Agreement provided that following a change of control, which included
the Share Exchange Transaction, we would be required to pay Mr. Kart a severance
payment of 100% of his annual salary. The Employment Agreement also provided
that following a change in control, all stock options previously granted to him
would immediately become fully exercisable. The amendment to the Employment
Agreement dated November 15, 2002 also provided for relocation expense payments
that were conditioned upon Mr. Kart's relocation to our former headquarters in
Florida, which occurred in early 2003. In connection with the Share Exchange
Transaction and the Confidentiality, Non-Competition, Non-Solicitation and
Consulting Agreement dated March 23, 2005 between us and Mr. Kart, Mr. Kart's
Employment Agreement was terminated and he waived the payments that otherwise
would have been due to him under the change of control provisions of his
Employment Agreement.

Under an agreement with our formerly wholly-owned subsidiary, Sentaur
Corp., we were party to an employment agreement with Steven DeLisi that
commenced on September 3, 2002 and expired on December 31, 2004. Mr. DeLisi's
annual salary was $175,000 per annum and he was granted stock options under our
1995 Incentive Stock Option Plan to purchase up to 50,000 shares of our common
stock. Mr. DeLisi also participated in a bonus program that provided a bonus of
50% of his salary upon the achievement of $25,000 in profits for three
consecutive months. During the first twelve months of his employment, Mr. DeLisi
received an interim bonus of $5,000 for each signed customer contract.

In May 2002 we signed a five and a half year lease to occupy a 7,300 square
foot building in Coral Springs, Florida. We terminated this lease on January 14,
2005, and the building was sold, concurrently, by the landlord. This property
was owned and operated by B&B Lakeview Realty Corp., one shareholders of which,
Barry Siegel, was our former Chairman of the Board, President and Chief
Executive Officer, another shareholder of which, Kenneth J. Friedman, was a
member of our Board of Directors and another shareholder of which, Barry
Spiegel, was formerly a member of our Board of Directors. The terms of the lease
required net rentals increasing in annual amounts from $127,000 to $168,000 plus
real estate taxes, insurance and other operating expenses. The lease period
commenced in October 2002 and was to terminate five years and six months
thereafter. Our company and the landlord each expended approximately $140,000 to
complete the interior space. In addition, during July 2002, we pledged $300,000
in an interest bearing account initially as a certificate of deposit, with a
Florida bank (the mortgage lender to B&B Lakeview Realty Corp) as security for
our future rental commitments for the benefit of the landlord's mortgage lender.
The certificate of deposit was to decline in $100,000 increments on the 36th
month, 48th month, and 60th month, as the balance of the rent commitment
declined. These funds, along with unpaid and earned interest, were returned us
in January 2005 upon the consummation of the sale of the building. We also had a
security deposit of $22,000 held by the related party which was also repaid at
that time. At our request, the Landlord agreed to sell the building and permit
us to terminate this lease early, in exchange for our reimbursing the Landlord
for the prepayment penalty that the Landlord incurred due to the early pay off
of its mortgage loan. These fees paid to the Landlord equaled far less than our
liabilities pursuant to the lease. During the 2004 Period we paid B&B Lakeview
Realty rent payments of $145,000. Operating expenses, insurance and taxes, as
required by the lease, were generally paid directly to the providers by us.

In December 2004, we sold certain fully depreciated personal property
assets, which we anticipated would be transferred to Mr. Siegel upon
consummation of the Share Exchange Transaction. The proceeds, equal to
approximately $14,000, were advanced to Mr. Siegel in anticipation of the
transaction being completed. Upon learning that this advance was prohibited
under Section 402 of the Sarbanes-Oxley Act of 2002, Mr. Siegel repaid the
advance in February 2005.

TRANSACTIONS BETWEEN OUR NOW-WHOLLY-OWNED SUBSIDIARIES AND THEIR RELATED
PARTIES PRIOR TO THE SHARE EXCHANGE TRANSACTION

Please note that the Certain Relationships and Related Transactions set
forth below are with regard to PEI California, Kinergy and ReEnergy, which
became our wholly-owned subsidiaries in connection with the Share Exchange
Transaction.

TRANSACTIONS BETWEEN PEI CALIFORNIA AND ITS RELATED PARTIES

Neil M. Koehler, our President and Chief Executive Officer and a director
is also the Chief Executive Officer of PEI California and was the sole manager
and sole limited liability company member of Kinergy and a limited liability
company member of Kinergy Resources, LLC, which was a member of ReEnergy. Mr.
Koehler did not receive compensation from PEI California.

Tom Koehler, our Vice President, Public Policy and Markets, also held the
same position with PEI California and was a limited liability company member of
ReEnergy. Mr. Koehler is the brother of Neil M. Koehler and received
compensation from PEI California (through Celilo Group, LLC) as an independent
contractor.

PEI California and ReEnergy are parties to an Option to Purchase Land dated
August 28, 2003, pursuant to which ReEnergy has agreed to sell approximately 89
acres of real property in Visalia to PEI California at a price of $12,000 per
acre, with respect to which real property ReEnergy has executed an Option
Agreement dated as of July 20, 2003 with Kent Kaulfuss, who was a limited
liability company member of ReEnergy, and his wife, which Option Agreement
grants ReEnergy an option to purchase such real property for a purchase price of
$1,071,600 on or before December 15, 2005 and requires ReEnergy to lease the
Wood Industries plant (comprising 35 acres) to Wood Industries (which is owned
by Kent Kaulfuss and his wife) for an indefinite period of time for a monthly
rental of $800. Accordingly, if the real property is purchased by PEI California
pursuant to the terms of the Option to Purchase Land dated August 28, 2003, Kent
Kaulfuss and his wife will realize a gain on sale of approximately $178,600.

PEI California entered into a consulting agreement with Ryan W. Turner, our
Chief Operating Officer and Secretary, and a former director, for consulting
services at $6,000 per month. During 2004, PEI California paid Mr. Turner a
total of $72,000 pursuant to such consulting contract. This consulting agreement
was terminated in connection with Mr. Turner's entry into an Executive
Employment Agreement with us as described above under "Management - Employment
Contracts and Termination of Employment and Change-in-Control Arrangements."

PEI California sold various cattle feed products in 2003 totaling $109,698,
to a business owned by William L. Jones, our Chairman of the Board and a
director.

PEI California reimbursed Mr. Jones an aggregate of $200,000 during 2003
for expenses paid on behalf of PEI California.

On October 27, 2003, William and Maurine Jones, Ryan and Wendy Turner and
Andrea Jones entered into an agreement with Southern Counties Oil Co., a former
shareholder of PEI California, of which Frank P. Greinke, one of our directors
and a director of PEI California, is the owner and CEO, to sell 1,500,000 shares
of common stock of PEI California personally held by them at $1.50 per share for
total proceeds of $2,250,000. In connection with the sale of the shares, the
parties entered into a Voting Agreement under which William and Maurine Jones,
Ryan and Wendy Turner and Andrea Jones agreed to vote a significant number of
their existing shares of common stock of PEI California in favor of Mr. Greinke
to be elected to the board of directors of PEI California or any
successor-in-interest to PEI California, including Pacific Ethanol.

Barry Siegel, on the one hand, and William and Maurine Jones, Ryan and
Wendy Turner and Andrea Jones, on the other, negotiated the terms of a stock
purchase agreement that provided for, among other things, the sale of an
aggregate of 250,000 shares of common stock of PEI California to Mr. Siegel for
an aggregate purchase price of $25.00.

Immediately prior to the closing of the Share Exchange Transaction, William
L. Jones sold 200,000 shares of common stock of PEI California to the individual
members of ReEnergy at $.01 per share, to compensate them for facilitating the
closing of the Share Exchange Transaction.

Immediately prior to the closing of the Share Exchange Transaction, William
L. Jones sold 300,000 shares of common stock of PEI California to Neil M.
Koehler at $.01 per share to compensate Mr. Koehler for facilitating the closing
of the Share Exchange Transaction.

Immediately prior to the closing of the Share Exchange Transaction, William
L. Jones sold 100,000 shares of common stock of PEI California to Tom Koehler at
$.01 per share to compensate Mr. Koehler for facilitating the closing of the
Share Exchange Transaction.

TRANSACTIONS BETWEEN KINERGY AND ITS RELATED PARTIES

Neil M. Koehler, our President and Chief Executive Officer and one of our
directors, is also the Chief Executive Officer of PEI California and was the
sole manager and sole limited liability company member of Kinergy and was a
limited liability company member of Kinergy Resources, LLC, which was a member
of ReEnergy. Mr. Koehler did not receive compensation from PEI California and
did not receive compensation in his capacity as the sole manager of Kinergy.

Neil M. Koehler is the brother of Tom Koehler, our Vice President, Public
Policy and Markets. Tom Koehler was a limited liability company member of
ReEnergy.

One of Kinergy's larger customers is SC Fuels, Inc. Southern Counties Oil
Co., an affiliate of SC Fuels, Inc., was a principal shareholder of PEI
California and is one of our former shareholders. Mr. Frank P. Greinke, the
President of SC Fuels, Inc., is one of our directors and is a director of PEI
California. During the nine months ended September 30, 2005 and during the
fiscal year ended December 31, 2004, SC Fuels, Inc. accounted for approximately
8% and 13%, respectively, of the total revenues of Kinergy.

TRANSACTIONS BETWEEN REENERGY AND ITS RELATED PARTIES

TRANSACTIONS BETWEEN US AND OUR RELATED PARTIES AT THE TIME OF OR AFTER THE
SHARE EXCHANGE TRANSACTION

We issued to Philip B. Kart, our former Senior Vice President, Secretary,
Treasurer and Chief Financial Officer, 200,000 shares of common stock in
consideration of Mr. Kart's obligations under a Confidentiality,
Non-Competition, Non-Solicitation and Consulting Agreement that was entered into
in connection with the Share Exchange Transaction.

We issued to Barry Siegel, our former Chairman of the Board, President and
Chief Executive Officer, 400,000 shares of common stock in consideration of Mr.
Siegel's obligations under a Confidentiality, Non-Competition, Non-Solicitation
and Consulting Agreement that was entered into in connection with the Share
Exchange Transaction. We also transferred DriverShield CRM Corp., one of our
wholly-owned subsidiaries, to Mr. Siegel in connection with this transaction. In
addition we sold Sentaur Corp., another of our wholly-owned subsidiaries, to Mr.
Siegel for the cash sum of $5,000.

In connection with the Share Exchange Transaction, we entered into
Confidentiality, Non-Competition and Non-Solicitation Agreements with each of
Neil M. Koehler, Tom Koehler, William L. Jones and Ryan W. Turner. The agreement
is substantially the same for each of the foregoing persons, except as otherwise
noted below, and provides for certain standard confidentiality protections in
our favor prohibiting each of the foregoing persons, each of whom is a
stockholder and our officers and/or directors, from disclosure or use of our
confidential information. The agreement also provides that each of the foregoing
persons is prohibited from competing with us for a period of five years;
however, Neil M. Koehler's agreement provides that he is prohibited from
competing with us for a period of three years. In addition, during the period
during which each of the foregoing persons is prohibited from competing, they
are also prohibited from soliciting our customers, employees or consultants and
are further prohibited from making disparaging comments regarding us, our
officers or directors, or our other personnel, products or services.

In connection with the Share Exchange Transaction, we became the sole owner
of the membership interests of Kinergy. Neil M. Koehler, our President and Chief
Executive Officer and one of our directors and principal stockholders was
formerly the sole owner of the membership interests of Kinergy and personally
guaranteed certain obligations of Kinergy to Comerica Bank. As part of the
consummation of the Share Exchange Transaction, we executed a Letter Agreement
dated March 23, 2005 with Mr. Koehler that provides that we will, as soon as
reasonably practical, replace Mr. Koehler as guarantor under certain financing
agreements between Kinergy and Comerica Bank. Under the Letter Agreement, prior
to the time that Mr. Koehler is replaced by us as guarantor under such financing
agreements, we will defend and hold harmless Mr. Koehler, his agents and
representatives for all losses, claims, liabilities and damages caused or
arising from out of (i) our failure to pay our indebtedness under such financing
agreements in the event that Mr. Koehler is required to pay such amounts to
Comerica Bank pursuant to his guaranty agreement with Comerica Bank, or (ii) a
breach of our duties to indemnify and defend as set forth above.

On July 26, 2005, we issued options to purchase up to 50,000 shares of our
common stock to William L. Jones, options to purchase up to 20,000 shares of our
common stock to Terry L. Stone, options to purchase up to 15,000 shares of our
common stock to Frank P. Greinke, options to purchase up to 15,000 shares of our
common stock to John Pimentel, who was then a current director and is now a
former director, and options to purchase up to 15,000 shares of our common stock
to Ken Freidman. The options have an exercise price of $8.25 per share, which
represents the closing price of a share of our common stock on the date of
grant. The options have a term of 10-years and vest in full one year from their
date of grant.

On July 26, 2005, we set the compensation and expense reimbursement
policies for non-employee members of our board of directors, which policies were
made retroactive to May 18, 2005. The Chairman of the Board, currently William
L. Jones, is to receive annual compensation of $80,000. Each member of our board
of directors, including the Chairman of the Board, is to receive $1,500 for each
board or committee meeting attended, whether attended in person or
telephonically. The Chairman of the audit committee, currently Terry L. Stone,
is to receive an additional $2,000 for each audit committee meeting attended,
whether in person or telephonically. In addition, non-employee directors are
reimbursed for certain reasonable and documented expenses in connection with
attendance at meetings of our board of directors and committees.

On July 28, 2005, we issued options to purchase up to 15,000 shares of our
common stock to Charles W. Bader, a director, and options to purchase up to
15,000 shares of our common stock to John L. Prince, a director. The options
have an exercise price of $8.30 per share, which represents the closing price of
a share of our common stock on the date of grant. The options have a term of
10-years and vest in full one year from their date of grant.

On August 10, 2005, we issued options to purchase up to 425,000 shares of
our common stock to William G. Langley, our Chief Financial Officer. The options
have an exercise price of $8.03 per share, which represents the closing price of
a share of our common stock on the date immediately preceding the date of grant.
The options have a term of 10-years. The options vested immediately as to 85,000
shares and vest as to an additional 85,000 shares on each of the first, second,
third and fourth anniversaries of the date of grant.

On September 19, 2005, we issued 3,000 shares of common stock to Kenneth J.
Friedman, a director, upon exercise of outstanding options with an exercise
price of approximately $5.63 per share for total gross proceeds of approximately
$16,875.

On November 3, 2005, William L. Jones, our Chairman, executed a Continuing
Guaranty in favor of W. M. Lyles Co. Under the Guaranty, Mr. Jones guarantees to
W. M. Lyles Co. the payment obligations of PEI California under a certain Letter
Agreement between PEI California and W. M. Lyles Co. The Letter Agreement
relates to a Phase 2 Design-Build Agreement between Pacific Ethanol Madera, LLC,
a wholly-owned subsidiary of PEI California, or PEI Madera, and W. M. Lyles Co.
relating to the construction of our ethanol production facility in Madera
County. The Letter Agreement provides that, in the event that W. M. Lyles Co.
pays performance liquidated damages to PEI Madera as a result of a defect
attributable Delta-T Corporation, the engineer for the ethanol production
facility in Madera County, or in the event that W. M. Lyles Co. pays liquidated
damages to PEI Madera under the Phase 2 Design-Build Agreement as a result of a
delay that is attributable to Delta-T Corporation, then PEI California agrees to
reimburse W. M. Lyles Co. for such liquidated damages. However, PEI California
is not responsible for the first $2.0 million of reimbursement. In addition, in

the event that W. M. Lyles Co. recovers amounts from Delta-T Corporation for
such defect or delay, then W. M. Lyles Co. is to not seek reimbursement from PEI
California. The aggregate reimbursement obligations of PEI California under the
Letter Agreement are not to exceed $8.1 million. Under the Guaranty, W. M. Lyles
Co. is to seek payment on a pro rata basis from Mr. Jones and Neil M. Koehler
(as described below), but in the event that Mr. Koehler fails to make payment,
then Mr. Jones is responsible for any shortfall. However, the full extent of Mr.
Jones' liability under his Guaranty, including for any shortfall for non-payment
by Mr. Koehler, is limited to $4.0 million plus any attorneys' fees, costs and
expenses.

On November 3, 2005, Neil M. Koehler, a director and our President and
Chief Executive Officer, executed a Continuing Guaranty in favor of W. M. Lyles
Co. Under the Guaranty, Mr. Koehler guarantees to W. M. Lyles Co. the payment
obligations of PEI California under the aforementioned Letter Agreement. Under
the Guaranty, W. M. Lyles Co. is to seek payment on a pro rata basis from
Messrs. Jones (as described above) and Koehler, but in the event that Mr. Jones
fails to make payment, then Mr. Koehler is responsible for any shortfall.
However, the full extent of Mr. Koehler's liability under his Guaranty,
including for any shortfall for non-payment by Mr. Jones, is limited to $4.0
million plus any attorneys' fees, costs and expenses.

On November 14, 2005, William L. Jones, Neil M. Koehler, Ryan W. Turner,
Kenneth J. Friedman and Frank P. Greinke, each of whom is a stockholder and one
of our directors and/or executive officers, or the Stockholders, and us, entered
into a Voting Agreement, or the Voting Agreement, with Cascade Investment,
L.L.C. The Stockholders collectively hold an aggregate of approximately 9.2
million shares of our common stock. The Voting Agreement provides that the
Stockholders may not transfer their shares of our common stock, and must keep
their shares free of all liens, proxies, voting trusts or agreements until the
Voting Agreement is terminated. The Voting Agreement provides that the
Stockholders will each vote or execute a written consent in favor of a private
placement transaction under which Cascade Investment, L.L.C. is to purchase
5,250,000 shares of Series A Cumulative Redeemable Convertible Preferred Stock
for an aggregate purchase price of $84.0 million. In addition, under the Voting
Agreement, each Stockholder grants an irrevocable proxy to Neil M. Koehler, a
director and our President and Chief Executive Officer, to act as such
Stockholder's proxy and attorney-in-fact to vote or execute a written consent in
favor of the sale of the preferred stock. The Voting Agreement is effective
until the earlier of the approval of the sale of the preferred stock by our
stockholders or the termination of the purchase agreement under which the
preferred stock is to be sold in accordance with its terms.

We are or have been a party to employment and compensation arrangements
with related parties, as more particularly described above under the headings
"Compensation of Executive Officers," "Employment Contracts and Termination of
Employment and Change-in-Control Arrangements" and "Compensation of Directors."

We have entered into an indemnification agreement with each of our
directors and executive officers. The indemnification agreements and our
certificate of incorporation and bylaws require us to indemnify our directors
and officers to the fullest extent permitted by Delaware law.

PRINCIPAL STOCKHOLDERS

The following table sets forth information with respect to the beneficial
ownership of our common stock as of November 21, 2005, the date of the table,
by:

o each person known by us to beneficially own more than 5% of the
outstanding shares of our common stock;
o each of our directors;
o each of our current executive officers identified at the beginning of
the "Management" section of this prospectus; and
o all of our directors and executive officers as a group.

Beneficial ownership is determined in accordance with the rules of the
Commission, and includes voting or investment power with respect to the
securities. To our knowledge, except as indicated by footnote, and subject to
community property laws where applicable, the persons named in the table below
have sole voting and investment power with respect to all shares of common stock
shown as beneficially owned by them. Shares of common stock underlying
derivative securities, if any, that currently are exercisable or convertible or
are scheduled to become exercisable or convertible for or into shares of common
stock within 60 days after the date of the table are deemed to be outstanding in
calculating the percentage ownership of each listed person or group but are not
deemed to be outstanding as to any other person or group. Percentage of
beneficial ownership is based on 28,667,185 shares of common stock outstanding
as of the date of the table.

The address of each of the following stockholders, unless otherwise
indicated in the footnotes to the table, is c/o Pacific Ethanol, Inc., 5711 N.
West Avenue, Fresno, California 93711. Messrs. Jones, Koehler, Greinke, Bader,
Prince, Stone and Friedman are directors of Pacific Ethanol. Messrs. Koehler,
Turner and Langley are executive officers of Pacific Ethanol.

AMOUNT AND NATURE PERCENT
NAME OF BENEFICIAL OWNER TITLE OF CLASS OF BENEFICIAL OWNERSHIP OF CLASS
--------------------------------------------------- -------------- ----------------------- --------

William L. Jones................................... Common 2,500,000 (1) 8.72%
Neil M. Koehler.................................... Common 4,188,139 14.61%
Ryan W. Turner..................................... Common 914,166 (2) 3.19%
William G. Langley................................. Common 85,000 (3) *
Frank P. Greinke................................... Common 1,500,000 (4) 5.23%
Charles W. Bader................................... Common -- *
John L. Prince..................................... Common -- *
Terry L. Stone..................................... Common -- *
Kenneth J. Friedman................................ Common 93,399 (5) *
Crestview Capital Master, LLC...................... Common 2,889,000 (6) 9.86%
Lyles Diversified, Inc............................. Common 2,000,000 (7) 6.98%
Rubicon Master Fund................................ Common 1,742,000 (8) 5.99%
All executive officers and directors as a group
(9 persons)..................................... Common 9,280,704 (9) 32.24%

---------------
* Less than 1.00%
(1) Represents shares held by William L. Jones and Maurine Jones, husband and
wife, as community property.
(2) Represents shares held by Ryan W. Turner and Wendy Turner, husband and
wife, as community property.
(3) Represents shares of common stock underlying options.
(4) Represents shares held by the Greinke Personal Living Trust. Mr. Greinke
is a trustee of the Greinke Personal Living Trust. Mr. Greinke has sole
voting and sole investment power over the shares held by the trust.
(5) Includes 33,000 shares underlying options.
(6) Includes 624,000 shares underlying warrants. Power to vote or dispose of
the shares is shared by Daniel Warsh, Stewart Flink and Robert Hoyt as
Managing Members of Crestview Capital Master, LLC. The address for Messrs.
Warsh, Flink and Hoyt is c/o Crestview Capital Master, LLC, 95 Revere
Drive, Suite A, Northbrook, IL 60062.
(7) Based on information included by Lyles Diversified, Inc. in a Schedule 13D
for May 27, 2005. Lyles Diversified, Inc. reported that it holds sole
voting and dispositive power over 2,000,000 shares. The Schedule 13D was
executed by William M. Lyles IV, as Vice-President of Lyles Diversified,
Inc. The address for Lyles Diversified, Inc. is P.O. Box 4376, Fresno, CA
93744.
(8) Includes 402,000 shares underlying warrants. Power to vote or dispose of
the shares is shared by Rubicon Fund Management Ltd. and Rubicon Fund
Management LLP. Each of Rubicon Fund Management Ltd., Rubicon Fund
Management LLP, Paul Anthony Brewer, Jeffrey Eugene Brummette, William
Francis Callanan, Vilas Gadkari, Robert Michael Greenshields and Horace
Joseph Leitch III may be deemed to be beneficial owners of the securities
held by Rubicon Master Fund, each of whom disclaim beneficial ownership of
the securities held by Rubicon Master Fund. The address for each of the
foregoing entities and individuals is c/o Rubicon Master Fund, 103 Mount
Street, London W1K2TJ, United Kingdom.
(9) Includes 118,000 shares underlying options.

SELLING SECURITY HOLDERS

SELLING SECURITY HOLDER TABLE

This prospectus covers the offer and sale by the selling security holders
of up to an aggregate of 11,778,454 shares of common stock, including an
aggregate of 8,825,867 issued and outstanding shares of our common stock and an
aggregate of 2,952,587 shares of our common stock underlying warrants. The
following table sets forth, to our knowledge, certain information about the
selling security holders as of November 21, 2005, the date of the table, based
on information furnished to us by the selling security holders. Except as
indicated in the private placement descriptions or footnotes following the table
(i) each selling security holder has indicated to us that it is acting
individually, not as a member of a group, and (ii) none of the selling security
holders or their affiliates, or the placement agents who subsequently
transferred warrants to certain selling security holders, as described in the
footnotes following the table, has held any position or office or had any other
material relationship with us in the past three years.

The shares of common stock being offered under this prospectus may be
offered for sale from time to time during the period the registration statement
of which this prospectus is a part remains effective, by or for the accounts of
the selling security holders described below.

The following entities or persons are NASD-registered broker-dealers, or
affiliates of NASD-registered broker-dealers, who initially acquired their
shares of common stock offered for resale hereunder, or warrants, the underlying
shares of common stock of which are offered for resale hereunder, from PEI
California, or from placement agents who received them from PEI California, as
compensation for transaction-based investment banking services relating to one
or more private placement transactions of PEI California that occurred prior the
consummation of the Share Exchange Transaction:

o Laird Q. Cagan, Registered Representative of Chadbourn Securities,
Inc., an NASD-registered broker-dealer;
o Chadbourn Securities, Inc. is an NASD-registered broker-dealer; and
o Robert A. Bonelli, Stephen J. Perrone, William P. Behrens, Danny
Nicholas, David T. R. Tsiang, Yaudoon Chiang, William T. Behrens,
Orrie L. Tawes, III, and Stephan H. Kim are each officers of Northeast
Securities, Inc., an NASD-registered broker-dealer.

The following entities or persons are affiliates of NASD-registered
broker-dealers who initially acquired their shares of common stock offered for
resale hereunder, or warrants, the underlying shares of common stock of which
are offered for resale hereunder, in certain private placement transactions of
PEI California that occurred prior the consummation of the Share Exchange
Transaction, each of whom may be deemed underwriters with respect to their
respective shares of common stock offered for resale hereunder:

o Stewart Flink, a Managing Member of Crestview Capital Master, LLC, is
the controlling shareholder of Dillon Capital, Inc., an
NASD-registered broker dealer;
o Neuberger Berman Asset Management, LLC, the General Partner of both
LibertyView Funds, LP and LibertyView Special Opportunities Fund, LP,
is an affiliate of Neuberger Berman, LLC, an NASD-registered broker
dealer;
o Lorraine DiPaolo is President of Benchmark Capital Advisors, a
subsidiary of Northeast Securities, Inc., an NASD-registered
broker-dealer;
o Peter S. Rawlings is Chairman and Chief Executive Officer of US
ReSecurities, LLC, an NASD-registered broker dealer;
o Richard Zorn is an executive officer of Benchmark Capital Advisors, a
subsidiary of Northeast Securities, Inc., an NASD-registered broker
dealer;
o W. Denman Zirkle is registered as an agent with First Dominion Capital
Corp., an NASD-registered broker dealer;
o Paul Coviello, President of Linden Capital Management, LLC as General
Partner of Linden Growth Partners, L.P., is a Registered
Representative of First Montauk, an NASD-registered broker dealer; and
o James George is a Senior Vice President, Institutional Bond Sales of
Countrywide Securities, an NASD-registered broker dealer.

Each of the selling security holders, including the selling security
holders identified above, has represented to us that it is not acting as an
underwriter in this offering, any warrants it received whose underlying shares
are offered under this prospectus, and other shares of common stock offered
under this prospectus, were received only in the ordinary course of business,
and at the time of such receipt and through the effective date of the
information contained in the selling security holder table, it had no agreements
or understandings, directly or indirectly, with any person to distribute the
warrants, the underlying shares or other shares of common stock offered under
this prospectus.

SHARES OF
SHARES OF COMMON STOCK SHARES OF COMMON STOCK
BENEFICIALLY OWNED COMMON BENEFICIALLY OWNED
PRIOR TO OFFERING STOCK AFTER OFFERING
NAME OF -------------------------- BEING ---------------------
BENEFICIAL OWNER NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE
---------------------------------------------- --------- ---------- --------- -------- ----------
The Churchill Fund, QP........................ 65,000 (19) * 65,000 (a)(19) - -
Barry H. Garfinkel............................ 52,000 (20) * 52,000 (a)(20) - -
The Churchill Fund, LP........................ 52,000 (21) * 52,000 (a)(21) - -
Jean F. Hieber................................ 65,000 (22) * 65,000 (a)(22) - -
Civic Capital Fund I, LLC..................... 39,000 (23) * 39,000 (a)(23) - -
Jacob S. Harris............................... 169,000 (24) * 39,000 (a)(24) - -
Jeremy Harding................................ 39,000 (25) * 39,000 (a)(25) - -
Peter S. Rawlings............................. 39,000 (26) * 39,000 (a)(26) - -
Richard Zorn.................................. 39,000 (27) * 39,000 (a)(27) - -
Scott M. Hergott and Cheryl L. Hergott, Trustees
of the Scott M. and Cheryl L. Hergott Living
Trust 2003 dated 12/18/03.................. 46,700 (28) * 39,000 (a)(28) 7,700 *
Erik Kuntz.................................... 26,000 (29) * 26,000 (a)(29) - -
Growth Ventures Inc. Pension Plan & Trust..... 26,000 (30) * 26,000 (a)(30) - -
Harry Haushalter and Theresa Haushalter JTROW. 26,000 (31) * 26,000 (a)(31) - -
Mitchell N. Kessler........................... 26,000 (32) * 26,000 (a)(32) - -
Ronald B. Sunderland.......................... 26,000 (33) * 26,000 (a)(33) - -
Sensus LLC.................................... 26,000 (34) * 26,000 (a)(34) - -
Bette-Lee Jablow and Jay T. Jablow, Trustees
of the Jablow Family Trust Under Agreement
Dated 11/25/1991........................... 13,000 (35) * 13,000 (a)(35) - -
Brent Saunders and Amy Saunders JTROW......... 13,000 (36) * 13,000 (a)(36) - -
Cantybay Enterprises, Ltd..................... 13,000 (37) * 13,000 (a)(37) - -
Christina J. Hieber........................... 13,000 (38) * 13,000 (a)(38) - -
Daniel J. Hurley, III......................... 13,000 (39) * 13,000 (a)(39) - -
Douglas M. Kerr and Joan Walter JTROW......... 13,000 (40) * 13,000 (a)(40) - -
Edmund Karam and Barbara Karam JTROW.......... 13,000 (41) * 13,000 (a)(41) - -
Gem Holdings, LLC............................. 13,000 (42) * 13,000 (a)(42) - -
Georgeanne S. Eaton........................... 13,000 (43) * 13,000 (a)(43) - -
Gregg Mullery................................. 23,000 (44) * 23,000 (a)(44) - -
Harvey B. Jacobson, Jr........................ 13,000 (45) * 13,000 (a)(45) - -
Jack Fishman.................................. 13,000 (46) * 13,000 (a)(46) - -
Jennifer M. Hieber............................ 13,000 (47) * 13,000 (a)(47) - -
Marie Carlino................................. 13,000 (48) * 13,000 (a)(48) - -
Mary A. Susnjara IRA.......................... 13,000 (49) * 13,000 (a)(49) - -
Dana Miller................................... 13,000 (50) * 13,000 (a)(50) - -
Paul B. Waine and Dale W. Waine, Trustees of the
Josephine P. Waine 1992 Trust dated 12/14/1992 13,000 (51) * 13,000 (a)(51) - -
Robert P. Maerz............................... 13,000 (52) * 13,000 (a)(52) - -
Roger L. Goettsche............................ 13,000 (53) * 13,000 (a)(53) - -
Swartz Family Holdings, LLC................... 13,000 (54) * 13,000 (a)(54) - -
Estate of Barbara White Fishman............... 13,000 (55) * 13,000 (a)(55) - -
William Alexander............................. 13,000 (56) * 13,000 (a)(56) - -
William D. Hyler.............................. 13,000 (57) * 13,000 (a)(57) - -
Anne O'Malley................................. 6,500 (58) * 6,500 (a)(58) - -

SHARES OF
SHARES OF COMMON STOCK SHARES OF COMMON STOCK
BENEFICIALLY OWNED COMMON BENEFICIALLY OWNED
PRIOR TO OFFERING STOCK AFTER OFFERING
NAME OF -------------------------- BEING ---------------------
BENEFICIAL OWNER NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE
---------------------------------------------- --------- ---------- --------- -------- ----------
Venkata Kollipara............................. 46,500 (59) * 16,500 (a)(59) 10,000 *
James and Bernice Campbell.................... 8,500 (60) * 8,500 (a)(60) - -
Malcolm B. O'Malley........................... 6,500 (61) * 6,500 (a)(61) - -
W. Denman Zirkle.............................. 126,666 * 126,666 (b) - -
Bradley N. Rotter, as Trustee of the Bradley N.
Rotter Self-Employed Pension & Trust....... 216,667 (62) * 66,667 (b)(62) - -
Joseph B. Childrey............................ 40,000 * 40,000 (b) - -
Barry Fay..................................... 35,000 * 35,000 (b) - -
David DeSilva................................. 35,000 * 35,000 (b) - -
Teixeira Investments, L.P..................... 34,000 (63) * 34,000 (63) - -
James A. Turner and Jennifer L. Turner,
Trustees, Turner Family Trust dated
February 18, 2004.......................... 26,667 (64) * 20,000 (64) 6,667 *
Clark M. Abramson and Patti L. Abramson....... 20,000 (65) * 20,000 (65) - -
Micaela Zirkle Shaughnessy.................... 20,000 * 20,000 (b) - -
Elizabeth A. Reed............................. 17,000 * 17,000 (b) - -
Luise Bettina Zirkle-Garcia................... 16,667 * 16,667 (b) - -
Sigrid Anne Zirkle Carroll.................... 16,667 * 16,667 (b) - -
William Wade Zirkle........................... 16,667 * 16,667 (b) - -
Illiquid Assets Trust, U/T/A dated November 22,
1999, FBO Peter H. Koehler, Jr............. 16,667 (66) * 16,667 (b)(66) - -
Roger H. Manternach........................... 16,667 * 16,667 (b) - -
Michael Kemp.................................. 14,000 * 14,000 (b) - -
Michael A. Frangopoulos....................... 10,000 (67) * 10,000 (b)(67) - -
Venkata Kollipara, Custodian for Priya Kollipara 46,500 (68) * 10,000 (b)(68) 10,000 *
Venkata Kollipara, Custodian for Puneet Kollipara 46,500 (69) * 10,000 (b)(69) 10,000 *
Robert E. Dettle, as Trustee of the Robert E.
and Rosalie T. Dettle Living Trust, dtd
Feb. 29, 1980.............................. 10,000 * 10,000 (b) - -
Daniel J. Yates............................... 10,000 * 10,000 (b) - -
Alex Jachno and Agafia Jachno................. 12,000 * 12,000 (b) - -
Armen Arzoomanian............................. 10,000 * 10,000 (b) - -
Lakshmana R. Madala, M.D. Defined Benefits Plan 13,400 (70) * 10,000 (b)(70) - -
Dermot Fallon................................. 8,000 * 8,000 (b) - -
Jay D. Scott.................................. 8,000 * 8,000 (b) - -
John G. Fallon and Anne M. Fallon............. 8,000 * 8,000 (b) - -
Henry H. Mauz, Jr............................. 8,000 * 8,000 (b) - -
Katharine B. Moore............................ 7,000 * 7,000 (b) - -
Louis S. Lyras................................ 7,000 * 7,000 (b) - -
Edward W. Muransky, as Trustee of the Edward W.
Muransky Revocable Trust, dtd July 24, 1995 7,000 * 7,000 (b) - -
Kennon Harlen White........................... 7,000 * 7,000 (b) - -
R.V. Edwards, Jr.............................. 17,000 * 17,000 (b) - -

SHARES OF
SHARES OF COMMON STOCK SHARES OF COMMON STOCK
BENEFICIALLY OWNED COMMON BENEFICIALLY OWNED
PRIOR TO OFFERING STOCK AFTER OFFERING
NAME OF -------------------------- BEING ---------------------
BENEFICIAL OWNER NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE
---------------------------------------------- --------- ---------- --------- -------- ----------
Janet Dumper.................................. 5,000 * 5,000 (b) - -
Robert A. Dumper.............................. 5,000 * 5,000 (b) - -
John Burke.................................... 5,000 * 5,000 (b) - -
Howard Kaplan................................. 10,000 * 10,000 (b) - -
James Burkdoll................................ 4,000 * 4,000 (b) - -
Richard DeSousa............................... 4,000 * 4,000 (b) - -
Steve Elefter................................. 4,000 * 4,000 (b) - -
David Jessen.................................. 4,000 * 4,000 (b) - -
Boyd and Barbara LaCosse...................... 3,400 * 3,400 (b) - -
Lakshmana R. Madala........................... 13,400 (71) * 3,400 (b)(71) - -
Thomas McFaul................................. 3,400 * 3,400 (b) - -
Anne P. Zirkle................................ 3,333 * 3,333 (b) - -
Rogene Scott Turner TTEE Rogene Scott Turner
Trust dtd. 9/10/91......................... 3,000 (72) * 3,000 (b)(72) - -
Samuel Kozasky................................ 2,000 * 2,000 (b) - -
Linden Growth Partners, L.P................... 625,000 (73) 2.18% 250,000 (c)(73) 375,000 1.19%
Bradley N. Rotter............................. 216,667 (74) * 150,000 (c)(74) - -
Michael L. Peterson........................... 187,500 (75) * 37,500 (c)(75) 150,000 *
Andrew Hoffman................................ 25,000 * 25,000 (c) - -
Barry J. Uphoff............................... 12,500 * 12,500 (c) - -
Stephen J. George............................. 12,500 * 12,500 (c) - -
James George.................................. 12,500 * 12,500 (c) - -
R. Oliver Bock and Deirdre A. Stegman, as
Trustees of the Bock Stegman Trust dated
January 11, 2000........................... 43,333 (76) * 43,333 (d)(76) - -
Michael T. Bock, Trustee of the Michael T. Bock
Revocable Trust dated November 10, 2003.... 43,333 (77) * 43,333 (d)(77) - -
Jon Spar and Karen A. Kulikowski.............. 35,100 (78) * 35,100 (d)(78) - -
Peter A. Bock................................. 13,000 (79) * 13,000 (d)(79) - -
Helaine Kaplan................................ 150,000 * 150,000 (e) - -
Doug Dickson.................................. 45,000 * 45,000 (f) - -
Paul P. Koehler............................... 72,223 (80) * 25,000 (f)(80) 47,223 *
Jeffrey H. Manternach......................... 25,000 (81) * 25,000 (g)(81) - -
Laird Q. Cagan................................ 848,949 (82) 2.94% 236,449 (h)(82) 612,500 1.94%
Frank Siefert................................. 1,000 (83) * 1,000 (i)(83) - -
Prima Capital Group, Inc...................... 30,320 (84) * 30,320 (j)(84) - -
Chadbourn Securities, Inc..................... 12,918 (85) * 12,918 (k)(85) - -
Fairmont Analytics, Inc....................... 12,500 (86) * 12,500 (l)(86) - -
Demetri Argyropoulos.......................... 3,200 (83) * 3,200 (m)(83) - -
Kathleen Cole................................. 5,000 (83) * 5,000 (l)(83) - -
Patricia Prass................................ 2,000 (83) * 2,000 (l)(83) - -
Barbara Hall.................................. 2,000 (83) * 2,000 (l)(83) - -
Robert A. Bonelli............................. 50,000 (83) * 50,000 (n)(83) - -
Stephen J. Perrone............................ 50,000 (83) * 50,000 (n)(83) - -
William P. Behrens............................ 40,000 (83) * 40,000 (n)(83) - -
Danny Nicholas................................ 15,000 (83) * 15,000 (n)(83) - -

----------------
* Less than 1.00%

(a) The shares of common stock and the warrants exchanged by the selling
security holder in connection with the Share Exchange Transaction for the
shares of common stock offered hereunder, including shares of common stock
that underlie warrants, were initially acquired from PEI California in a
private placement transaction in March 2005 under which PEI California
raised an aggregate of $21.0 million at $3.00 per share and issued 7.0
million shares of common stock and warrants to purchase an aggregate of
700,000 and 1.4 million shares of common stock at an exercise price of
$5.00 and $3.00 per share, respectively. PEI California also issued
placement agent warrants to acquire up to an aggregate of 678,000 shares of
common stock at an exercise price of $3.00 per share. In aggregate,
9,778,000 shares of common stock resulting from this private placement
transaction are being offered hereunder for resale.
(b) The shares of common stock and the warrants exchanged by the selling
security holder in connection with the Share Exchange Transaction for the
shares of common stock offered hereunder were initially acquired from PEI
California in a private placement transaction in February 2004 under which
PEI California raised an aggregate of approximately $1.1 million at $1.50
per share and issued 752,201 shares of common stock. PEI California also
issued placement agent warrants to acquire up to an aggregate of 43,487
shares of common stock at an exercise price of $1.50 per share. In
aggregate, 795,688 shares of common stock resulting from this private
placement transaction are being offered hereunder for resale.
(c) The shares of common stock and the warrants exchanged by the selling
security holder in connection with the Share Exchange Transaction for the
shares of common stock offered hereunder were initially acquired from PEI
California in a private placement transaction in May 2004 under which PEI
California raised an aggregate of $1.0 million at $2.00 per share and
issued 500,000 shares of common stock. PEI California also issued placement
agent warrants to acquire up to an aggregate of 50,000 shares of common
stock at an exercise price of $2.00 per share. In aggregate, 550,000 shares
of common stock resulting from this private placement transaction are being
offered hereunder for resale.
(d) The shares of common stock and the warrants exchanged by the selling
security holder in connection with the Share Exchange Transaction for the
shares of common stock offered hereunder were initially acquired from PEI
California in a private placement transaction in December 2004 under which
PEI California raised an aggregate of approximately $300,000 at $3.00 per
share and issued 103,666 shares of common stock and warrants to purchase an
aggregate of 31,100 shares of common stock at an exercise price of $3.00
per share. In aggregate, 134,766 shares of common stock resulting from this
private placement transaction are being offered hereunder for resale.
(e) The shares of common stock offered by the selling security holder hereunder
were acquired from us in March 2005 for services rendered by Ms. Kaplan as
a finder in connection with the Share Exchange Transaction.

(f) The shares of common stock offered by the selling security holder hereunder
were acquired from us in June 2005 as a signing bonus in connection with
the selling security holder's acceptance of employment.
(g) The securities exchanged by the selling security holder in connection with
the Share Exchange Transaction were initially acquired from PEI California
as incentive compensation in connection with the selling security holder's
employment.

(h) Of the shares of common stock offered by the selling security holder
hereunder, 198,740 shares underlie warrants transferred to the holder by
Chadbourn Securities, Inc. that were initially acquired from PEI California
in connection with the private placement offering described in footnote (a)
above, 13,459 shares underlie warrants transferred to the holder by
Cagan-McAfee Capital Partners, LLC that were initially acquired from PEI
California in connection with the private placement offering described in
footnote (b) above and 24,250 shares underlie warrants transferred to the
holder by Cagan-McAfee Capital Partners, LLC that were initially acquired
from PEI California in connection with the private placement offering
described in footnote (c) above. Chadbourn Securities, Inc. and
Cagan-McAfee Capital Partners, LLC acted as placement agents and initially
received these warrants as compensation for services performed in
connection with the private placement offerings described in footnotes (a),
and (b) and (c), above, respectively. In connection with its March 2005
offering, PEI California entered into an agreement with Chadbourn
Securities, Inc. for placement agent services. Under this agreement, PEI
California agreed to pay to Chadbourn Securities, Inc. 2% of gross proceeds
plus a 1% non-accountable expense allowance as well as warrants exercisable
at the offering price in an amount equal to 3% of the aggregate number of
shares of common stock sold in the private offering. Under this agreement,
PEI California paid to Chadbourn Securities, Inc. approximately $625,000
and issued warrants to Chadbourn Securities, Inc. to purchase 212,700
shares of common stock at $3.00 per share. In April 2004, PEI California
entered into an agreement with Cagan McAfee Capital Partners, LLC for
advisory services. Under this agreement, PEI California agreed to pay to
Cagan McAfee Capital Partners, LLC 3% of any equity amount raised through
the efforts of Cagan McAfee Capital Partners, LLC. In connection with its
March 2005 private placement, PEI California paid to Cagan McAfee Capital
Partners, LLC $235,000 and in connection with the Share Exchange
Transaction, we paid approximately $85,000 to Cagan McAfee Capital
Partners, LLC. We terminated the advisory agreement with Cagan McAfee
Capital Partners, LLC on November 1, 2005, subject to completion of an
investment by Cascade Investment, L.L.C. described below and elsewhere in
this prospectus, and made a payment of $150,000 in accelerated monthly
consulting fees under the agreement. In addition, in connection with the
termination of this agreement, we agreed that, in the event that our sale
of Series A Cumulative Redeemable Convertible Preferred Stock to Cascade
Investment, L.L.C. is completed, we would pay to Cagan McAfee Capital
Partners, LLC approximately $1.0 million. Also, certain founders of PEI
California agreed to sell an aggregate of 500,000 shares of common stock
owned by them to Cagan McAfee Capital Partners, LLC for a purchase price of
$0.01 per share for securing financing to close the Share Exchange
Transaction. Immediately prior to the consummation of the Share Exchange
Transaction, these founders sold these shares to Cagan McAfee Capital
Partners, LLC at the agreed upon price. Prior to the aforementioned
transactions, PEI California paid fees of $100,000 to Cagan McAfee Capital
Partners, LLC in connection with other private placement offerings and
issued warrants to Cagan McAfee Capital Partners, LLC to purchase 50,000
shares of common stock at $2.00 per share.

(i) Mr. Siefert acted as a placement agent and initially received these
warrants from PEI California as compensation for services performed in
connection with the private placement offering described in footnote (b)
above.
(j) Prima Capital Group, Inc. acted as a placement agent and initially received
warrants to acquire 2,000 shares and 28,320 shares of common stock from PEI
California as compensation for services performed in connection with the
private placement offerings described in footnotes (a) and (b) above,
respectively.

(k) Of the shares of common stock offered by the selling security holder
hereunder, 708 shares underlie warrants transferred to the holder by
Cagan-McAfee Capital Partners, LLC that were initially acquired from PEI
California in connection with the private placement offering described in
footnote (b) above and 1,750 shares underlie warrants transferred to the
holder by Cagan-McAfee Capital Partners, LLC that were initially acquired
from PEI California in connection with the private placement offering
described in footnote (c) above. In addition, Chadbourn Securities, Inc.
acted as a placement agent and initially received warrants to acquire
225,200 shares of common stock from PEI California as compensation for
services performed in connection with the private placement offering
described in footnote (a) above, of which Chadbourn Securities, Inc.
transferred warrants to purchase an aggregate of 214,740 shares of common
stock and retained warrants to purchase an aggregate of 10,460 shares of
common stock. See also footnote (h) above.

(l) The shares of common stock offered by the selling security holder hereunder
underlie warrants transferred to the holder by Cagan-McAfee Capital
Partners, LLC that were initially acquired from PEI California in
connection with the private placement offering described in footnote (c)
above. Cagan-McAfee Capital Partners, LLC acted as a placement agent and
initially received these warrants as compensation for services performed in
connection with the private placement offering described in footnote (c)
above. See also footnote (h) above.
(m) Of the shares of common stock offered by the selling security holder
hereunder, 700 shares underlie warrants transferred to the holder by
Chadbourn Securities, Inc. that were initially acquired from PEI California
in connection with the private placement offering described in footnote (a)
above and 2,500 shares underlie warrants transferred to the holder by
Cagan-McAfee Capital Partners, LLC that were initially acquired from PEI
California in connection with the private placement offering described in
footnote (b) above. Chadbourn Securities, Inc. and Cagan-McAfee Capital
Partners, LLC acted as placement agents and initially received these
warrants as compensation for services performed in connection with the
private placement offerings described in footnotes (a) and (b), above,
respectively. See also footnote (h) above.
(n) The shares of common stock offered by the selling security holder hereunder
underlie warrants transferred to the holder by Northeast Securities, Inc.
that were initially acquired from PEI California in connection with the
private placement offering described in footnote (a) above. Northeast
Securities, Inc. acted as a placement agent and initially received these
warrants as compensation for services performed in connection with the
private placement offering described in footnote (a) above. In connection
with its March 2005 private offering, PEI California entered into an
agreement with Northeast Securities, Inc. for placement agent services.
Under this agreement, PEI California agreed to pay to Northeast Securities,
Inc. 6% of gross proceeds plus a 1% non-accountable expense allowance as
well as warrants exercisable at the offering price in an amount equal to 7%
of the aggregate number of shares of common stock sold in the private
offering. Under this agreement, PEI California paid to Northeast
Securities, Inc. approximately $1.2 million and issued warrants to
Northeast Securities, Inc. to purchase 450,800 shares of common stock at
$3.00 per share.
(o) The shares of common stock offered by the selling security holder hereunder
underlie warrants transferred to the holder by Chadbourn Securities, Inc.
that were initially acquired from PEI California in connection with the
private placement offering described in footnote (a) above. Chadbourn
Securities, Inc. acted as a placement agent and initially received these
warrants as compensation for services performed in connection with the
private placement offering described in footnote (a) above. See also
footnote (h) above.
(p) The shares of common stock offered by the selling security holder hereunder
underlie warrants transferred to the holder by Robert Scott who received
the warrants from Chadbourn Securities, Inc. that were initially acquired
from PEI California in connection with the private placement offering
described in footnote (a) above. Chadbourn Securities, Inc. acted as a
placement agent and initially received these warrants as compensation for
services performed in connection with the private placement offering
described in footnote (a) above. See also footnote (h) above.
(q) The shares of common stock exchanged by the selling security holder in
connection with the Share Exchange Transaction for the shares of common
stock offered hereunder, were initially acquired from William and Maurine
Jones, Ryan and Wendy Turner and Andrea Jones under a stock purchase
agreement that provided for the sale of an aggregate of 250,000 shares of
common stock of PEI California to Mr. Siegel for an aggregate purchase
price of $25.00. William L. Jones is our Chairman of the Board and Ryan W.
Turner is our Chief Operating Officer and our Secretary. In aggregate,
250,000 shares of common stock resulting from this transaction are being
offered hereunder for resale.

(r) The shares of common stock offered by the selling security holder hereunder
underlie warrants transferred to the holder by Colin Winthrop & Co. Inc.
that were initially acquired from Accessity, our predecessor company, in
June 2001 and February 2002 as compensation for investment banking
services. In aggregate, 22,000 shares of common stock resulting from this
transaction are being offered hereunder for resale.
(s) The shares of common stock offered by the selling security holder hereunder
underlie warrants that were acquired from Accessity, our predecessor
company, in June 2001 as compensation for investment banking services. In
aggregate, 3,000 shares of common stock resulting from this transaction are
being offered hereunder for resale.
(1) Includes 624,000 shares underlying warrants. Power to vote or dispose of
the shares is shared by Daniel Warsh, Stewart Flink and Robert Hoyt as
Managing Members of Crestview Capital Master, LLC. The address for Messrs.
Warsh, Flink and Hoyt is c/o Crestview Capital Master, LLC, 95 Revere
Drive, Suite A, Northbrook, IL 60062.

(2) Includes 402,000 shares underlying warrants. Power to vote or dispose of
the shares is shared by Rubicon Fund Management Ltd. and Rubicon Fund
Management LLP. Each of Rubicon Fund Management Ltd., Rubicon Fund
Management LLP, Paul Anthony Brewer, Jeffrey Eugene Brummette, William
Francis Callanan, Vilas Gadkari, Robert Michael Greenshields and Horace
Joseph Leitch III may be deemed to be beneficial owners of the securities
held by Rubicon Master Fund, each of whom disclaim beneficial ownership of
the securities held by Rubicon Master Fund. The address for each of the
foregoing entities and individuals is c/o Rubicon Master Fund, 103 Mount
Street, London W1K2TJ, United Kingdom.
(3) Includes 231,000 shares underlying warrants. Power to vote or dispose of
the shares is held by Harris Toibb as sole manager and member of TOIBB
Management LLC, as Manager of TOIBB Investment LLC.
(4) Includes 81,000 shares underlying warrants and 270,000 shares of common
stock. Power to vote or dispose of the shares is shared by Lorraine DiPaolo
and Richard Whitman as Managing Members of Benchmark Partners, LP. In
addition, 24,000 shares underlying warrants and 80,000 shares of common
stock are held by Lorraine DiPaolo as an individual, which shares are also
being offered under this prospectus.
(5) Includes 69,000 shares underlying warrants and 230,000 shares of common
stock. Power to vote or dispose of the shares is held by Richard A. Meckler
as Managing Director of Neuberger Berman, LLC, authorized representative of
Neuberger Berman, Inc., the sole managing member of Neuberger Berman Asset
Management, LLC, the General Partner of LibertyView Special Opportunities
Fund, LP. In addition, 30,000 shares underlying warrants and 100,000 shares
of common stock are held by LibertyView Funds, LP, which shares are also
offered under this prospectus, the power to vote or dispose of which is
also held by Richard A. Meckler as Managing Director of Neuberger Berman,
LLC authorized representative of Neuberger Berman, Inc., the sole managing
member of Neuberger Berman Asset Management, LLC, the General Partner of
LibertyView Funds, LP.
(6) Includes 60,000 shares underlying warrants. Power to vote or dispose of the
shares is held by Keith Goodman as Manager of Nite Capital LLC, as General
Partner of Nite Capital LP.
(7) Includes 54,000 shares underlying warrants and 180,000 shares of common
stock. Power to vote or dispose of the shares is held by Melville Straus as
Managing Principal of Straus Partners, LP. In addition, 45,000 shares
underlying warrants and 150,000 shares of common stock are also held by
Straus-GEPT Partners, LP, the power to vote or dispose of which is held by
Melville Straus as Managing Principal of Straus-GEPT Partners, LP., which
shares are also being offered under this prospectus.
(8) Includes 51,000 shares underlying warrants. Power to vote or dispose of the
shares is held by Peter E. Salas as General Partner of Dolphin Offshore
Partners, L.P.
(9) Includes 51,000 shares underlying warrants and 170,000 shares of common
stock. Power to vote or dispose of the shares is held by Ejnar Knudsen as
Executive Vice President of Western Milling LLC. In addition, 15,000 shares
underlying warrants and 50,000 shares of common stock are held by Craton
Capital, LP, which shares are also being offered under this prospectus, the
power to vote or dispose of which is shared by Raju Shah and Ejnar Knudsen
as members of Craton Capital GP, LLC, as the sole General Partner of Craton
Capital, LP.
(10) Includes 48,000 shares underlying warrants. Power to vote or dispose of the
shares is held by Kenneth L. Henderson as President of GCE Property
Holdings Inc.
(11) Includes 45,000 shares underlying warrants and 150,000 shares of common
stock. Power to vote or dispose of the shares is held by Melville Straus as
Managing Principal of Straus-GEPT Partners, LP. In addition, 54,000 shares
underlying warrants and 180,000 shares of common stock are held by Straus
Partners, LP, the power to vote or dispose of which is held by Melville
Straus as Managing Principal of Straus Partners, LP, which shares are also
being offered under this prospectus.
(12) Includes 30,000 shares underlying warrants and 100,000 shares of common
stock. Power to vote or dispose of the shares is held by Jacob S. Harris as
Managing Member of JSH Management Company, LP, as General Partner of JSH
Partners, L.P. In addition, 9,000 shares underlying warrants and 30,000
shares of common stock are held by Jacob S. Harris as an individual, which
shares are also being offered under this prospectus.
(13) Includes 30,000 shares underlying warrants and 100,000 shares of common
stock. Power to vote or dispose of the shares is held by Richard A. Meckler
as Managing Director of Neuberger Berman, LLC, authorized representative of
Neuberger Berman, Inc., the sole managing member of Neuberger Berman Asset
Management, LLC, the General Partner of LibertyView Funds, LP. In addition,
69,000 shares underlying warrants and 230,000 shares of common stock are
held by LibertyView Special Opportunities Fund, LP, which shares are also
offered under this prospectus, the power to vote or dispose of which is
also held by Richard A. Meckler as Managing Director of Neuberger Berman,
LLC, authorized representative of Neuberger Berman, Inc., the sole managing
member of Neuberger Berman Asset Management, LLC, the General Partner of
LibertyView Special Opportunities Fund, LP.
(14) Includes 30,000 shares underlying warrants.

(15) Includes 24,000 shares underlying warrants and 80,000 shares of common
stock. Also includes 81,000 shares underlying warrants and 270,000 shares
of common stock held by Benchmark Partners, LP., which shares are also
being offered under this prospectus, the power to vote or dispose of which
is shared by Lorraine DiPaolo and Richard Whitman as Managing Members of
Benchmark Partners, LP; accordingly, no shares are shown as being
beneficially owned after the offering.
(16) Includes 21,000 shares underlying warrants. Power to vote or dispose of the
shares is held by Neil C. Sullivan as Trustee of Fenway Advisory Group
Pension Plan. In addition, 2,800 shares underlying warrants are held by
Blair Capital, Inc., which shares are also offered under this prospectus,
the power to vote or dispose of which is also held by Neil C. Sullivan as
President of Blair Capital, Inc.
(17) Includes 15,000 shares underlying warrants and 50,000 shares of common
stock. Power to vote or dispose of the shares is shared by Raju Shah and
Ejnar Knudsen as members of Craton Capital GP, LLC, as the sole General
Partner of Craton Capital, LP. In addition, 51,000 shares underlying
warrants and 170,000 shares of common stock are held by Western Milling
LLC, which shares are also being offered under this prospectus, the power
to vote or dispose of which is held by Ejnar Knudsen as Executive Vice
President of Western Milling LLC.
(18) Includes 15,000 shares underlying warrants. Also includes 100,000 shares
held by the Michael Brown Trust dated 6/30/2000.
(19) Includes 15,000 shares underlying warrants and 50,000 shares of common
stock. Power to vote or dispose of the shares is held by Cecilia Brancato
as Managing Director of The Churchill Fund, QP. In addition, 12,000 shares
underlying warrants and 40,000 shares of common stock are held by The
Churchill Fund, LP, which shares are also offered under this prospectus,
the power to vote or dispose of which is also held by Cecilia Brancato as
Managing Director of The Churchill Fund, LP.
(20) Includes 12,000 shares underlying warrants.
(21) Includes 12,000 shares underlying warrants and 40,000 shares of common
stock. Power to vote or dispose of the shares is held by Cecilia Brancato
as Managing Director of The Churchill Fund, LP. In addition, 15,000 shares
underlying warrants and 50,000 shares of common stock are held by The
Churchill Fund, QP, which shares are also offered under this prospectus,
the power to vote or dispose of which is also held by Cecilia Brancato as
Managing Director of The Churchill Fund, QP.
(22) Includes 15,000 shares underlying warrants.
(23) Includes 9,000 shares underlying warrants. Power to vote or dispose of the
shares is held by John F. DeSantis as President of Civic Capital Fund I,
LLC.
(24) Includes 9,000 shares underlying warrants and 30,000 shares of common
stock. Also includes 30,000 shares underlying warrants and 100,000 shares
of common stock, the power to vote or dispose of which is held by Jacob S.
Harris as Managing Member of JSH Management Company, LP, as General Partner
of JSH Partners, L.P., which shares are also being offered under this
prospectus; accordingly, no shares are shown as being beneficially owned
after the offering.
(25) Includes 9,000 shares underlying warrants.
(26) Includes 9,000 shares underlying warrants.
(27) Includes 9,000 shares underlying warrants.
(28) Includes 9,000 shares underlying warrants. Power to vote or dispose of the
shares is shared by Scott M. Hergott and Cheryl L. Hergott as Trustees of
the Scott M. and Cheryl L. Hergott Living Trust 2003 dated 12/18/03. In
addition, 8,100 shares of common stock are held by Scott Hergott TTEE Scott
Hergott MMP Plan DTD 1/1/01 fbo Scott Hergott.
(29) Includes 6,000 shares underlying warrants.
(30) Includes 6,000 shares underlying warrants. Power to vote or dispose of the
shares is held by Gary J. McAdam as Trustee of Growth Ventures, Inc.
Pension Plan & Trust.
(31) Includes 6,000 shares underlying warrants.
(32) Includes 6,000 shares underlying warrants.
(33) Includes 6,000 shares underlying warrants.
(34) Includes 6,000 shares underlying warrants. Power to vote or dispose of the
shares is held by James Pizzo as President of Sensus LLC.
(35) Includes 3,000 shares underlying warrants. Power to vote or dispose of the
shares is shared by Bette-Lee Jablow and Jay T. Jablow as Trustees of the
Jablow Family Trust Under Agreement Dated 11/25/1991.
(36) Includes 3,000 shares underlying warrants.
(37) Includes 3,000 shares underlying warrants. Power to vote or dispose of the
shares is held by Thomas S. Torrance as Secretary and Director of Cantybay
Enterprises, Ltd.

(38) Includes 3,000 shares underlying warrants.
(39) Includes 3,000 shares underlying warrants.
(40) Includes 3,000 shares underlying warrants.
(41) Includes 3,000 shares underlying warrants.
(42) Includes 3,000 shares underlying warrants. Power to vote or dispose of the
shares is held by Marc Stern as Manager of Gem Holdings, LLC.
(43) Includes 3,000 shares underlying warrants.
(44) Includes 3,000 shares underlying warrants.
(45) Includes 3,000 shares underlying warrants.
(46) Includes 3,000 shares underlying warrants.
(47) Includes 3,000 shares underlying warrants.
(48) Includes 3,000 shares underlying warrants.
(49) Includes 3,000 shares underlying warrants. Power to vote or dispose of the
shares is held by Mary A. Susnjara.
(50) Includes 3,000 shares underlying warrants.
(51) Includes 3,000 shares underlying warrants. Power to vote or dispose of the
shares is shared by Paul B. Waine and Dale W. Waine as Trustees of the
Josephine P. Waine 1992 Trust dated 12/14/1992.
(52) Includes 3,000 shares underlying warrants.
(53) Includes 3,000 shares underlying warrants.
(54) Includes 3,000 shares underlying warrants. Power to vote or dispose of the
shares is held by Richard Swartz as Member of Swartz Family Holdings, LLC.
(55) Includes 3,000 shares underlying warrants. Power to vote or dispose of the
shares is held by Leslie Fishman as Executor of the Estate of Barbara White
Fishman.
(56) Includes 3,000 shares underlying warrants.
(57) Includes 3,000 shares underlying warrants.
(58) Includes 1,500 shares underlying warrants.
(59) Includes 1,500 shares underlying warrants. Also includes 25,000 shares held
directly by Venkata Kollipara, 15,000 shares of which are being offered
under this prospectus; and includes 10,000 shares held by Venkata Kollipara
as Custodian for Priya Kollipara and 10,000 shares held by Venkata
Kollipara as Custodian for Puneet Kollipara, all of which 20,000 shares are
being offered under this prospectus; accordingly, 10,000 shares are shown
as being beneficially owned after the offering.
(60) Includes 1,500 shares underlying warrants.
(61) Includes 1,500 shares underlying warrants.
(62) Includes 66,667 shares held by the Bradley N. Rotter Self-Employed Pension
& Trust and 150,000 shares held directly by Bradley N. Rotter as an
individual, for total of 216,667 shares, all of which are being offered
under this prospectus; accordingly, no shares are shown as being
beneficially owned after the offering.
(63) Power to vote or dispose of the shares is shared by Norman Teixeria, Allan
Teixeria, Marvin Teixeria, Glenn Teixeria and Dean Teixeria as members of
TLM, LLC, as General Partner of Teixeira Investments, L.P.
(64) Power to vote or dispose of the shares is shared by James A. Turner and
Jennifer L. Turner as Trustees of the Turner Family Trust dated February
18, 2004. James A. Turner and Jennifer L. Turner are the parents of Ryan W.
Turner, our Chief Operating Officer and Secretary. Ryan W. Turner is a
named co-beneficiary of the Turner Family Trust dated February 18, 2004.
(65) Represents shares held in the name of Clark M. Abramson and Patti L.
Abramson.
(66) Power to vote or dispose of the shares is shared by Robert Hirshon, Jon P.
Stride and Darcy M. Norville, Trustees of the Illiquid Assets Trust U/T/A
dated November 22, 1999 FBO Peter H. Koehler. Peter H. Koehler is the
brother of Neil M. Koehler, our Chief Executive Officer, President and a
director.
(67) Shares held in the name of Morgan Stanley DW Inc., Custodian for Michael
Frangopoulos IRA STD/Rollover dtd. 01/30/01. Power to vote or dispose of
the shares is held by Michael A. Frangopaulos.
(68) Includes 1,500 shares underlying warrants. Also includes 25,000 shares held
directly by Venkata Kollipara, 15,000 shares of which are being offered
under this prospectus; and includes 10,000 shares held by Venkata Kollipara
as Custodian for Priya Kollipara and 10,000 shares held by Venkata
Kollipara as Custodian for Puneet Kollipara, all of which 20,000 shares are
being offered under this prospectus; accordingly, 10,000 shares are shown
as being beneficially owned after the offering.

(69) Includes 1,500 shares underlying warrants. Also includes 25,000 shares held
directly by Venkata Kollipara, 15,000 shares of which are being offered
under this prospectus; and includes 10,000 shares held by Venkata Kollipara
as Custodian for Priya Kollipara and 10,000 shares held by Venkata
Kollipara as Custodian for Puneet Kollipara, all of which 20,000 shares are
being offered under this prospectus; accordingly, 10,000 shares are shown
as being beneficially owned after the offering.
(70) Includes 3,400 shares held directly by Lakshama R. Madala and 10,000 shares
held by the Lakshmana R. Madala, M.D. Defined Benefits Plan, all of which
13,400 shares are being offered under this prospectus. Power to vote or
dispose of the shares is held by Lakshmana R. Madala as Trustee of the
Lakshmana R. Madala, M.D. Defined Benefits Plan; accordingly, shares are
shown as being beneficially owned after the offering.
(71) Includes 3,400 shares held directly by Lakshama R. Madala and 10,000 shares
held by the Lakshmana R. Madala, M.D. Defined Benefits Plan, all of which
13,400 shares are being offered under this prospectus. Power to vote or
dispose of the shares is held by Lakshmana R. Madala as Trustee of the
Lakshmana R. Madala, M.D. Defined Benefits Plan; accordingly, shares are
shown as being beneficially owned after the offering.
(72) Rogene Scott Turner is the grandmother of Ryan W. Turner, our Chief
Operating Officer and Secretary.
(73) Power to vote or dispose of the shares is held by Paul Coviello as
President of Linden Capital Management, LLC, as General Partner of the
Linden Growth Partners, L.P.
(74) Includes 66,667 shares held by the Bradley N. Rotter Self-Employed Pension
& Trust and 150,000 shares held directly by Bradley N. Rotter as an
individual, for total of 216,667 shares, all of which are being offered
under this prospectus; accordingly, shares are shown as being beneficially
owned after the offering.
(75) Amount beneficially owned includes 150,000 shares held by the Peterson
Family Trust, DTD 8/16/2000. Power to vote or dispose of these 150,000
shares is shared by Michael L. Peterson and Shelley P. Peterson as Trustees
of the Peterson Family Trust, DTD 8/16/2000.
(76) Includes 10,000 shares underlying warrants. Power to vote or dispose of the
shares is shared by R. Oliver Bock and Deirdre A. Stegman as Trustees of
the Bock Stegman Trust dated January 11, 2000.
(77) Includes 10,000 shares underlying warrants.
(78) Includes 8,100 shares underlying warrants.
(79) Includes 3,000 shares underlying warrants.
(80) Paul P. Koehler is the brother of Neil M. Koehler, our Chief Executive
Officer, President and a director.
(81) Represents shares underlying warrants.
(82) Includes 236,449 shares underlying warrants. Also includes 512,500 held
directly by Laird Q. Cagan and 100,000 shares held by Cagan-McAfee
Partners, LLC. Power to vote or dispose of the shares held by Cagan-McAfee
Partners, LLC is shared by Laird Q. Cagan and Eric McAfee as members of
Cagan-McAfee Partners, LLC.
(83) Represents shares underlying warrants.
(84) Represents shares underlying warrants. Power to vote or dispose of the
shares is held by Elias D. Argyropoulos as President and Chief Executive
Officer of Prima Capital Group, Inc.
(85) Represents shares underlying warrants. Power to vote or dispose of the
shares is held by Dan Murphy as Chairman and Chief Executive Officer of
Chadbourn Securities, Inc.
(86) Represents shares underlying warrants. Power to vote or dispose of the
shares is held by Lara S. Coviello as President of Fairmont Analytics, Inc.
(87) Represents shares underlying warrants. Power to vote or dispose of the
shares is held by Neil C. Sullivan as President of Blair Capital, Inc. In
addition, 21,000 shares underlying warrants and 70,000 shares of common
stock are held by Fenway Advisory Group Pension Plan, which shares are also
offered under this prospectus, the power to vote or dispose of which is
also held by Neil C. Sullivan as Trustee of Fenway Advisory Group Pension
Plan.
(88) Represents shares underlying warrants. Power to vote or dispose of the
shares is held by Robert T. Scott as President of Sycamore Capital
Partners, Inc.
(89) Includes 373,595 shares of common stock held in the name of Barry Siegel
and 110,727 held in the name of Barry and Lisa Siegel. In addition, Lisa
Siegel, the spouse of Mr. Siegel, holds 14 shares of common stock solely in
her own name. We are party to a Confidentiality, Non-Competition,
Non-Solicitation and Consulting Agreement dated March 23, 2005 with Mr.
Siegel.
(90) Represents shares underlying warrants. Power to vote or dispose of the
shares is held by Rosanne Loffredo as President of Rotom Enterprises, Inc.
In addition, Thomas Loffredo, the spouse of Ms. Loffredo, holds 1,360
shares of common stock.
(91) Represents shares underlying warrants. Power to vote or dispose of the
shares is held by Jack Skidell as President of Colin Winthrop & Co., Inc.

PRIVATE PLACEMENTS TRANSACTIONS THROUGH WHICH THE SELLING SECURITY HOLDERS
OBTAINED BENEFICIAL OWNERSHIP OF THE OFFERED SHARES

All shares of common stock offered by the selling security holders
hereunder were acquired, or underlie warrants acquired, from us in connection
with the Share Exchange Transaction conducted in March 2005 among Pacific
Ethanol, Inc., PEI California, Kinergy and ReEnergy, except the shares offered
by Helaine Kaplan, Doug Dickson, Paul P. Koehler and Rotom Enterprises, which
were acquired in the manners described below.

TRANSACTIONS BY PACIFIC ETHANOL, INC.

SHARE EXCHANGE TRANSACTION

On March 23, 2005, we completed a Share Exchange Transaction with the
shareholders of PEI California and the holders of the membership interests of
each of Kinergy and ReEnergy under which we acquired all of the issued and
outstanding capital stock of PEI California and all of the outstanding
membership interests of Kinergy and ReEnergy.

In the Share Exchange Transaction we issued an aggregate of 20,610,987
shares of common stock to the shareholders of PEI California, 3,875,000 shares
of common stock to the limited liability company member of Kinergy and an
aggregate of 125,000 shares of common stock to the limited liability company
members of ReEnergy. In addition, holders of options and warrants to acquire an
aggregate of 3,157,587 shares of common stock of PEI California, following the
consummation of the Share Exchange Transaction, were deemed to hold warrants to
acquire an equal number of shares of our common stock. Also, a holder of a
promissory note convertible into an aggregate of 664,879 shares of common stock
of PEI California, following the consummation of the Share Exchange Transaction,
was entitled to convert the note into an equal number of shares of our common
stock. Immediately following the consummation of the Share Exchange Transaction,
we had an aggregate of 27,700,401 shares of common stock actually issued and
outstanding and an aggregate of 31,925,534 shares of common stock issued and
outstanding, calculated on a fully-diluted basis, including the 27,700,401
shares of common stock actually issued and outstanding and 4,225,133 shares of
common stock issuable upon exercise of all outstanding options, warrants and
convertible debt.

In aggregate, 11,555,454 shares of common stock resulting from the Share
Exchange Transaction including an aggregate of 8,605,867 issued and outstanding
shares of our common stock and an aggregate of 2,952,587 shares of our common
stock underlying warrants are being offered hereunder for resale, including the
shares of common stock, and shares of common stock underlying warrants,
initially issued by PEI California in the private placement transactions
described below, or acquired in the certain other transactions described below,
and exchanged in connection with the Share Exchange Transaction or, in the case
of Rotom Enterprises, Inc., acquired from Accessity Corp., our predecessor
company.

ISSUANCES SUBSEQUENT TO THE SHARE EXCHANGE TRANSACTION

In March 2005, we issued 150,000 shares of common stock to Helaine Kaplan
for services rendered as a finder in connection with the Share Exchange
Transaction, all of which shares resulting from this private placement
transaction are being offered hereunder for resale.

In June 2005, we granted 45,000 shares of common stock to Doug Dickson as a
signing bonus in connection with his acceptance of employment, all of which
shares resulting from this private placement transaction are being offered
hereunder for resale.

In June 2005, we granted 25,000 shares of common stock to Paul P. Koehler
as a signing bonus in connection with his acceptance of employment, all of which
shares resulting from this private placement transaction are being offered
hereunder for resale.

TRANSACTIONS BY PEI CALIFORNIA

The shares of common stock and the warrants exchanged by the selling
security holders in connection with the Share Exchange Transaction for the
shares of common stock offered hereunder, including shares of common stock that
underlie warrants, were initially acquired from PEI California in the following
private placement transactions.

Under PEI California's agreements with the investors in the following
private placement transactions, the investors are entitled under customary
provisions to have their shares of common stock, and the shares of common stock
underlying their warrants, registered for resale, including by successor
entities. We are registering for resale, under these registration rights
provisions, the shares of common stock issued in these offerings and the shares
of common stock underlying the warrants issued in these offerings. The placement
agent warrants issued in connection with these offerings are assignable, contain
customary terms including registration rights provisions that apply to successor
entities and also contain both cash and cashless exercise provisions. We are
also registering for resale, under these registration rights provisions, the
shares of common stock underlying the placement agent warrants issued in
connection with these private placement transactions.

FEBRUARY 2004 PRIVATE PLACEMENT

In February 2004, PEI California raised an aggregate of approximately $1.1
million at $1.50 per share and issued 752,201 shares of common stock. PEI
California also issued placement agent warrants to acquire up to an aggregate of
43,487 shares of common stock at an exercise price of $1.50 per share. In
aggregate, 795,688 shares of common stock resulting from this private placement
transaction are being offered hereunder for resale.

MAY 2004 PRIVATE PLACEMENT

In May 2004, PEI California raised an aggregate of $1.0 million at $2.00
per share and issued 500,000 shares of common stock. PEI California also issued
placement agent warrants to acquire up to an aggregate of 50,000 shares of
common stock at an exercise price of $2.00 per share. In aggregate, 550,000
shares of common stock resulting from this private placement transaction are
being offered hereunder for resale.

In May 2004, PEI California issued a stock option to Jeffrey H. Manternach
to acquire up to an aggregate of 25,000 shares of common stock at an exercise
price of $.01 per share, all of which shares are being offered hereunder for
resale. The option was issued as incentive compensation in connection with Mr.
Manternach's employment and, in connection with the Share Exchange Transaction,
the option was exchanged for a warrant to purchase an equal number of shares at
an equivalent exercise price.

DECEMBER 2004 PRIVATE PLACEMENT

In December 2004, PEI California raised an aggregate of approximately
$300,000 at $3.00 per share and issued 103,666 shares of common stock and
warrants to purchase an aggregate of 31,100 shares of common stock at an
exercise price of $3.00 per share. No placement agent warrants were issued in
connection with this offering. In aggregate, 134,766 shares of common stock
resulting from this private placement transaction are being offered hereunder
for resale.

MARCH 2005 PRIVATE PLACEMENT

In March 2005, PEI California raised an aggregate of $21.0 million at $3.00
per share and issued 7.0 million shares of common stock and warrants to purchase
an aggregate of 700,000 and 1.4 million shares of common stock at an exercise
price of $5.00 and $3.00 per share, respectively. PEI California also issued
placement agent warrants to acquire up to an aggregate of 678,000 shares of
common stock at an exercise price of $3.00 per share. The warrants to purchase
an aggregate of 2.1 million shares of common stock that were issued in
connection with this private placement transaction contain both cash and
cashless exercise provisions; however, the cashless exercise provisions
contained in these warrants are only applicable in the event that the
registration statement of which this prospectus forms a part is not effective,
or no current prospectus is available for the resale of the shares underlying
the warrants at any time after one-year from the date of issuance of the
warrants in March 2005. In aggregate, 9,778,000 shares of common stock resulting
from this private placement transaction are being offered hereunder for resale.

CERTAIN OTHER TRANSACTIONS

ROTOM ENTERPRISES, INC.

Of the shares of our common stock underlying warrants offered hereunder for
resale, 22,000 shares underlie warrants transferred to Rotom Enterprises, Inc.
by Colin Winthrop & Co. Inc. that were initially acquired from Accessity, our
predecessor company, in June 2001 and February 2002 as compensation for
investment banking services. In aggregate, 22,000 shares of common stock
resulting from this transaction are being offered hereunder for resale.

COLIN WINTHROP & CO., INC.

Of the shares of our common stock underlying warrants offered hereunder for
resale, 3,000 shares underlie warrants held by Colin Winthrop & Co. Inc. that
were acquired from Accessity, our predecessor company, in June 2001 as
compensation for investment banking services. In aggregate, 3,000 shares of
common stock resulting from this transaction are being offered hereunder for
resale.

MARCH 2005 STOCK PURCHASE

William and Maurine Jones, Ryan and Wendy Turner and Andrea Jones sold to
Barry Siegel an aggregate of 250,000 shares of common stock of PEI California
for an aggregate purchase price of $25.00. William L. Jones is our Chairman of
the Board and Ryan W. Turner is our Chief Operating Officer and our Secretary.
In aggregate, 250,000 shares of common stock resulting from this transaction are
being offered hereunder for resale.

PLAN OF DISTRIBUTION

The selling security holders and any of their donees, pledgees, assignees
and other successors-in-interest may, from time to time, sell any or all of
their shares of common stock being offered under this prospectus on any stock
exchange, market or trading facility on which the shares are traded, or in
private transactions. These sales, which may include block transactions, may be
at fixed or negotiated prices. The selling security holders may use any one or
more of the following methods when disposing of shares:

o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resales by the
broker-dealer for its own account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o through the distribution of the shares by any selling security holder
to its partners, members or stockholders;
o broker-dealers may agree with the selling security holders to sell a
specified number of shares at a stipulated price per share;
o one or more underwritten offerings on a firm commitment or best
efforts basis;
o a combination of any of these methods of sale; or
o any other method permitted by applicable law; provided, however, that
the selling security holders have agreed not to engage in short sales
involving the shares offered under this prospectus.

The shares may also be sold under Rule 144 under the Securities Act, if
available, rather than under this prospectus. The selling security holders have
the sole and absolute discretion not to accept any purchase offer or make any
sale of shares if they deem the purchase price to be unsatisfactory at any
particular time.

The selling security holders may pledge their shares to their brokers under
the margin provisions of customer agreements. If a selling security holder
defaults on a margin loan, the broker may, from time to time, offer and sell the
pledged shares.

Broker-dealers engaged by the selling security holders may arrange for
other broker-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling security holders (or, if any
broker-dealer acts as agent for the purchaser of shares, from the purchaser) in
amounts to be negotiated, which commissions as to a particular broker or dealer
may be in excess of customary commissions to the extent permitted by applicable
law.

If sales of shares offered under this prospectus are made to broker-dealers
as principals, we would be required to file a post-effective amendment to the
registration statement of which this prospectus is a part. In the post-effective
amendment, we would be required to disclose the names of any participating
broker-dealers and the compensation arrangements relating to such sales.

The selling security holders and any broker-dealers or agents that are
involved in selling the shares offered under this prospectus may be deemed to be
"underwriters" within the meaning of the Securities Act in connection with these
sales. Commissions received by these broker-dealers or agents and any profit on
the resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. Any broker-dealers or agents
that are deemed to be underwriters may not sell shares offered under this
prospectus unless and until we set forth the names of the underwriters and the
material details of their underwriting arrangements in a supplement to this
prospectus or, if required, in a replacement prospectus included in a
post-effective amendment to the registration statement of which this prospectus
is a part.

The selling security holders may sell all or any part of the shares offered
under this prospectus through an underwriter. To our knowledge, no selling
security holder has entered into any agreement with a prospective underwriter,
and we cannot assure you as to whether any such agreement will be entered into.
If a selling security holder informs us that it has entered into such an
agreement or agreements, any material details will be set forth in a supplement
to this prospectus or, if required, in a replacement prospectus included in a
post-effective amendment to the registration statement of which this prospectus
is a part.

The selling security holders and any other persons participating in the
sale or distribution of the shares offered under this prospectus will be subject
to applicable provisions of the Exchange Act, and the rules and regulations
under that act, including Regulation M. These provisions may restrict activities
of, and limit the timing of purchases and sales of any of the shares by, the
selling security holders or any other person. Furthermore, under Regulation M,
persons engaged in a distribution of securities are prohibited from
simultaneously engaging in market making and other activities with respect to
those securities for a specified period of time prior to the commencement of
such distributions, subject to specified exceptions or exemptions. All of these
limitations may affect the marketability of the shares.

This prospectus does not cover the sale or other transfer of any of the
derivative securities whose underlying shares of common stock are being offered
for sale pursuant to this prospectus. If a selling security holder transfers
those derivative securities prior to conversion or exercise, then the transferee
of those derivative securities may not sell the underlying shares of common
stock under this prospectus unless we amend or supplement this prospectus to
cover such sales.

In addition, if any of the shares of common stock offered for sale pursuant
to this prospectus are transferred other than pursuant to a sale under this
prospectus, then subsequent holders could not use this prospectus until a
post-effective amendment or prospectus supplement is filed, naming such holders.
We offer no assurance as to whether any of the selling security holders will
sell all or any portion of the shares offered under this prospectus.

For the period a selling security holder holds a derivative security whose
underlying shares of common stock are being offered for sale pursuant to this
prospectus, the selling security holder has the opportunity to profit from a
rise in the market price of our common stock without assuming the risk of
ownership of the underlying shares of common stock. The terms on which we could
obtain additional capital during the period in which those derivative securities
remain outstanding may be adversely affected. The holders of derivative
securities are most likely to voluntarily convert or exercise their derivative
securities when the conversion or exercise price is less than the market price
for our common stock. However, we offer no assurance as to whether any of those
derivative securities will be converted or exercised.

We have agreed to pay all fees and expenses incident to the registration of
the shares being offered under this prospectus. However, each selling security
holder and purchaser is responsible for paying any discounts, concessions and
similar selling expenses they incur.

We and certain of the selling security holders have agreed to indemnify one
another against certain losses, claims, damages and liabilities arising in
connection with this prospectus, including liabilities under the Securities Act.

DESCRIPTION OF CAPITAL STOCK

Our authorized capital stock consists of 100,000,000 shares of common
stock, $0.001 par value per share, and 10,000,000 shares of preferred stock,
$0.001 par value per share. As of November 21, 2005, there were 28,667,185
shares of common stock issued and outstanding and no shares of preferred stock
issued and outstanding. The following description of our capital stock does not
purport to be complete and should be reviewed in conjunction with our
certificate of incorporation and our bylaws.

COMMON STOCK

All outstanding shares of common stock are, and the common stock to be
issued upon exercise of warrants and resold by the selling security holders in
this offering will be, fully paid and nonassessable. The following summarizes
the rights of holders of our common stock:

o each holder of common stock is entitled to one vote per share on all
matters to be voted upon generally by the stockholders;
o subject to preferences that may apply to shares of preferred stock
outstanding, the holders of common stock are entitled to receive
lawful dividends as may be declared by our board of directors, see
"Dividend Policy";
o upon our liquidation, dissolution or winding up, the holders of shares
of common stock are entitled to receive a pro rata portion of all our
assets remaining for distribution after satisfaction of all our
liabilities and the payment of any liquidation preference of any
outstanding preferred stock;
o there are no redemption or sinking fund provisions applicable to our
common stock; and
o there are no preemptive or conversion rights applicable to our common
stock.

PREFERRED STOCK

Our board of directors is authorized to issue from time to time, without
stockholder authorization, in one or more designated series, any or all of our
authorized but unissued shares of preferred stock with any dividend, redemption,
conversion and exchange provision as may be provided in that particular series.

The rights of the holders of our common stock will be subject to, and may
be adversely affected by, the rights of the holders of any preferred stock that
may be issued in the future. Issuance of a new series of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of entrenching our board of
directors and making it more difficult for a third-party to acquire, or
discourage a third-party from acquiring, a majority of our outstanding voting
stock. Except as set forth below, we have no present plans to issue any shares
of or to designate any series of preferred stock.

SERIES A PREFERRED STOCK

In November 2005, we entered into an agreement for the sale by us of
5,250,000 shares Series A Cumulative Redeemable Convertible Preferred Stock, or
the Series A Preferred Stock, at a purchase price of $16 per share for total
aggregate proceeds of $84 million. We intend to create the Series A Preferred
Stock pursuant to a Certificate of Designations, Powers, Preferences and Rights
of the Series A Cumulative Redeemable Convertible Preferred Stock, or the

Certificate of Designations, the form of which is filed as an exhibit to the
registration statement of which this prospectus forms a part. Under the
Certificate of Designations, 7,000,000 shares are to be designated as Series A
Preferred Stock. Each share of Series A Preferred Stock is initially to be
convertible into two shares of our common stock. The conversion ratio is to be
subject to adjustment, including as a result of certain anti-dilutive issuances
of capital stock or securities convertible into our capital stock. The closing
of the sale of the Series A Preferred Stock is subject to numerous conditions,
including approval of the transaction by our stockholders. We may be unable to
satisfy all conditions to closing and therefore we may be unable to complete the
sale of the Series A Preferred Stock. If ultimately issued, the Series A
Preferred Stock could have the effect of delaying, deferring and discouraging
another party from acquiring control of Pacific Ethanol.

WARRANTS

As of November 21, 2005, we had outstanding warrants to purchase
approximately 3.1 million shares of our common stock at exercise prices ranging
from $0.001 to $5.00 per share.

OPTIONS

As of November 21, 2005, we had outstanding options to purchase 927,500
shares of our common stock at exercise prices ranging from $3.75 to $8.30 per
share.

REGISTRATION RIGHTS

The holders of various shares of our common stock and warrants are entitled
to rights with respect to the registration of their shares under the Securities
Act. These registration rights are described in "Selling Security Holders." In
addition, the holders of our Series A Preferred Stock, if ultimately issued, are
to have demand and other registration rights pursuant to a Registration Rights
and Stockholders Agreement, the form of which is filed as an exhibit to the
registration statement of which this prospectus forms a part.

ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND OUR CERTIFICATE OF INCORPORATION AND
BYLAWS

Certain provisions of Delaware law, our certificate of incorporation and
our bylaws contain provisions that could have the effect of delaying, deferring
and discouraging another party from acquiring control of us. These provisions,
which are summarized below, are expected to discourage coercive takeover
practices and inadequate takeover bids. These provisions are also designed to
encourage persons seeking to acquire control of us to first negotiate with our
board of directors. We believe that the benefits of increased protection of our
potential ability to negotiate with an unfriendly or unsolicited acquiror
outweigh the disadvantages of discouraging a proposal to acquire us because
negotiation of these proposals could result in an improvement of their terms.

UNDESIGNATED PREFERRED STOCK AND SERIES A PREFERRED STOCK

The ability to authorize undesignated preferred stock makes it possible for
our board of directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to acquire us. These
and other provisions may have the effect of deferring hostile takeovers or
delaying changes in control or management of Pacific Ethanol. In addition, if
ultimately issued, the Series A Preferred Stock could have the effect of
delaying, deferring and discouraging another party from acquiring control of
Pacific Ethanol. Also, in the event that the Series A Preferred Stock is issued,
we will be obligated to initially appoint two persons designated by the holders
of the Series A Preferred Stock to our board of directors and we will be
obligated to periodically nominate two persons designated by those holders for
election to our board of directors at annual meetings of our stockholders.

DELAWARE ANTI-TAKEOVER STATUTE

We are subject to the provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. In general, Section 203
prohibits a publicly-held Delaware corporation from engaging, under certain
circumstances, in a business combination with an interested stockholder for a
period of three years following the date the person became an interested
stockholder unless:

o prior to the date of the transaction, the board of directors of the
corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder;
o upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the stockholder owned at least 85%
of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the
number of shares of voting stock outstanding (but not the outstanding
voting stock owned by the stockholder) (1) shares owned by persons who
are directors and also officers and (2) shares owned by employee stock
plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will
be tendered in a tender or exchange offer; or
o on or subsequent to the date of the transaction, the business
combination is approved by the board and authorized at an annual or
special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66?% of the outstanding voting stock that
is not owned by the interested stockholder.

Generally, a business combination includes a merger, asset or stock sale,
or other transaction resulting in a financial benefit to the interested
stockholder. An interested stockholder is a person who, together with affiliates
and associates, owns or, within three years prior to the determination of
interested stockholder status, did own 15% or more of a corporation's
outstanding voting securities. We expect the existence of its provision to have
an anti-takeover effect with respect to transactions our board of directors does
not approve in advance. We also anticipate that Section 203 may also discourage
attempts that might result in a premium over the market price for the shares of
common stock held by stockholders.

The provisions of Delaware law, our certificate of incorporation and our
bylaws could have the effect of discouraging others from attempting hostile
takeovers and, as a consequence, they may also inhibit temporary fluctuations in
the market price of our common stock that often result from actual or rumored
hostile takeover attempts. These provisions may also have the effect of
preventing changes in our management. It is possible that these provisions could
make it more difficult to accomplish transactions that stockholders may
otherwise deem to be in their best interests.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for our common stock is North American
Stock Transfer Co. Its telephone number is (516) 379-8501.

LEGAL MATTERS

The validity of the shares of common stock offered in this offering will be
passed upon for us by Rutan & Tucker, LLP, Costa Mesa, California.

EXPERTS

Hein & Associates LLP, an independent registered public accounting firm,
has audited (i) Pacific Ethanol, Inc.'s consolidated balance sheets as of
December 31, 2004 and 2003, and related consolidated statements of operations,
stockholders' equity and cash flows for the year ended December 31, 2004 and the
period from January 30, 2003 (inception) to December 31, 2003, as set forth in
their report, (ii) Kinergy Marketing's balance sheets as of December 31, 2004,
2003 and 2002, and related statements of income and member's equity (deficit),
and cash flows for each of the years then ended, as set forth in their report,
and (iii) ReEnergy's balance sheets as of December 31, 2004, 2003 and 2002, and
related statements of operations, members' equity (deficit) and cash flows for
each of the years then ended, as set forth in their report.

We have included the consolidated financial statements of Pacific Ethanol,
Inc., Kinergy Marketing, LLC and ReEnergy, LLC in the prospectus and elsewhere
in the registration statement in reliance on the report of Hein & Associates
LLP, given on their authority as experts in accounting and auditing.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

We have filed a registration statement on Form S-1 with respect to the
common stock offered in this prospectus with the Commission in accordance with
the Securities Act, and the rules and regulations enacted under its authority.
This prospectus, which constitutes a part of the registration statement, does
not contain all of the information included in the registration statement and
its exhibits and schedules. Statements contained in this prospectus regarding
the contents of any document referred to in this prospectus are not necessarily
complete, and in each instance, we refer you to the full text of the document
which is filed as an exhibit to the registration statement. Each statement
concerning a document which is filed as an exhibit should be read along with the
entire document. For further information regarding us and the common stock
offered in this prospectus, we refer you to this registration statement and its
exhibits and schedules, which may be inspected without charge at the
Commission's Public Reference Room at 100 F Street N.E., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the Public
Reference Room.

The Commission also maintains an Internet website that contains reports,
proxy and information statements, and other information regarding issuers, such
as us, that file electronically with the Commission. The Commission's website
address is http://www.sec.gov.

INDEX TO FINANCIAL STATEMENTS

Page
----
Pacific Ethanol, Inc.
---------------------

Consolidated Balance Sheets as of September 30, 2005 (unaudited) and December 31, 2004.................F-2
Consolidated Statement of Operations for the Three and Nine Months Ended
September 30, 2005 and 2004 (unaudited)..........................................................F-4
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2005 and 2004 (unaudited)..........................................................F-5
Notes to Consolidated Financial Statements for the Nine Months Ended
September 30, 2005 (unaudited)...................................................................F-7

Pacific Ethanol, Inc.
---------------------

Report of Independent Registered Public Accounting Firm................................................F-22
Consolidated Balance Sheets as of December 31, 2004 and 2003...........................................F-23
Consolidated Statement of Operations for the Year Ended December 31, 2004 and
for the period from January 30, 2003 (inception) to December 31, 2003............................F-24
Consolidated Statement of Stockholders' Equity for the Year Ended December 31, 2004
and for the period from January 30, 2003 (inception) to December 31, 2003........................F-25
Consolidated Statements of Cash Flows for the Year Ended December 31, 2004
and the period from January 30, 2003 (inception) to December 31, 2003............................F-26
Notes to Consolidated Financial Statements.............................................................F-27

Kinergy Marketing, LLC
----------------------

Report of Independent Registered Public Accounting Firm................................................F-45
Balance Sheets as of December 31, 2004, 2003 and 2002..................................................F-46
Statements of Income and Member's Equity for the Years Ended December 31, 2004, 2003
and 2002.........................................................................................F-47
Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002..........................F-48
Notes to Financial Statements..........................................................................F-49

ReEnergy, LLC
-------------

Report of Independent Registered Public Accounting Firm................................................F-54
Balance Sheets as of December 31, 2004, 2003 and 2002..................................................F-55
Statements of Operations for the Years Ended December 31, 2004, 2003 and 2002..........................F-56
Statements of Member's Equity (Deficit) for the Years Ended December 31, 2004, 20037
and 2002.........................................................................................F-57
Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002..........................F-58
Notes to Financial Statements..........................................................................F-59

Index to Pro Forma Financial Statements................................................................F-61
---------------------------------------

F-1

PACIFIC ETHANOL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2005 AND DECEMBER 31, 2004

September 30,
2005 December 31,
ASSETS (unaudited) 2004
------ ------------ ------------

CURRENT ASSETS:
Cash and cash equivalents $ 11,344,034 $ 42
Accounts receivable (including $396,129 and $0 as
of September 30, 2005 and December 31, 2004,
respectively, from a related party) 2,418,598 8,464
Inventories 633,691 --
Prepaid expenses 1,303,150 --
Prepaid inventory 593,636 293,115
Other current assets 59,811 484,485
------------ ------------
Total current assets 16,352,920 786,106
------------ ------------
PROPERTY AND EQUIPMENT, NET 13,416,453 6,324,824

OTHER ASSETS:
Debt issuance costs, net 53,333 68,333
Deposits 14,086 --
Intangible assets, net 10,508,082 --
------------ ------------
Total other assets 10,575,501 68,333
------------ ------------
TOTAL ASSETS $ 40,344,874 $ 7,179,263
============ ============

See accompanying notes to condensed consolidated financial statements.

F-2

PACIFIC ETHANOL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2005 AND DECEMBER 31, 2004 (CONTINUED)

September 30,
2005 December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited) 2004
------------------------------------ ------------ ------------

CURRENT LIABILITIES:
Accounts payable - trade $ 2,400,739 $ 383,012
Accounts payable - related party 1,294,566 846,211
Accrued retention - related party 505,385 --
Accrued payroll -- 18,963
Accrued interest payable -- 30,864
Other accrued liabilities 845,306 531,803
------------ ------------
Total current liabilities 5,045,996 1,810,853

RELATED-PARTY NOTE PAYABLE 2,948,081 4,012,678

COMMITMENTS AND CONTINGENCIES (NOTES 4 AND 5)

STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value; 10,000,000 shares
authorized, no shares issued and outstanding as of
September 30, 2005 and December 31, 2004 -- --
Common stock, $0.001 par value; 100,000,000 shares
authorized, 28,667,185 and 13,445,866 shares issued
and outstanding as of September 30, 2005 and
December 31, 2004, respectively 28,667 13,446
Additional paid-in capital 42,374,060 5,071,632
Unvested consulting expense (1,583,739) --
Due from stockholders (600) (68,100)
Accumulated deficit (8,467,591) (3,661,246)
------------ ------------
Total stockholders' equity 32,350,797 1,355,732
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 40,344,874 $ 7,179,263
============ ============

See accompanying notes to condensed consolidated financial statements.

F-3

PACIFIC ETHANOL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)

Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------

Net sales (including $2,165,315 and $4,017,322 $ 26,414,305 $ 829 $ 51,530,735 $ 16,832
for the three and nine months ended September 30,
2005, respectively, to a related party)

Cost of goods sold 24,778,592 -- 49,695,870 10,789
------------ ------------ ------------ ------------
Gross profit 1,635,713 829 1,834,865 6,043

Operating expenses:

Selling, general and administrative
expenses 2,206,985 287,672 3,999,653 714,730

Services rendered in connection with
feasibility study -- -- 852,250 --

Non-cash compensation and consulting
fees 406,331 345,000 1,749,967 862,500
------------ ------------ ------------ ------------
Loss from operations (977,603) (631,843) (4,767,005) (1,571,187)

Other income (expense):

Other income 872 2,317 27,267 2,368

Interest income (expense) 54,947 (148,731) (61,007) (415,726)
------------ ------------ ------------ ------------
Loss before provision for income taxes (921,784) (778,257) (4,800,745) (1,984,545)

Provision for income taxes 800 6,000 5,600 8,400
------------ ------------ ------------ ------------
Net loss $ (922,584) $ (784,257) $ (4,806,345) $ (1,992,945)
============ ============ ============ ============
Weighted Average Shares Outstanding 28,614,819 12,334,591 23,841,380 12,064,684
============ ============ ============ ============
Net Loss Per Share $ (0.03) $ (0.06) $ (0.20) $ (0.17)
============ ============ ============ ============

See accompanying notes to condensed consolidated financial statements.

F-4

PACIFIC ETHANOL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)

Nine Months Ended
September 30,
----------------------------
2005 2004
------------ ------------

Net loss $ (4,806,345) $ (1,992,945)
Adjustments to reconcile net loss to
cash used in operating activities:
Depreciation and amortization of intangibles 488,861 58,894
Amortization of debt issuance costs 15,000 15,000
Interest expense relating to amortization of debt discount 180,403 180,402
Non-cash compensation expense 951,706 --
Non-cash consulting expense 798,261 862,500
Services rendered in connection with feasibility study 702,250 --

(Increase) decrease in:
Accounts receivable 101,525 15,551
Inventories (52,126) --
Prepaid expenses and other assets (1,181,449) (13,558)
Prepaid inventory (286,074) --
Other receivable (319) 224,490

Increase (decrease) in:
Accounts payable 177,564 (106,141)
Accounts payable, related party 448,355 325,035
Accrued retention, related party 505,385 --
Accrued payroll (18,963) (3,579)
Accrued interest payable (31,315) (131,574)
Accrued liabilities 277,993 444,934
------------ ------------
Net cash used in operating activities (1,729,288) (120,991)
------------ ------------
Cash flows from Investing Activities:
Additions to property, plant and equipment (7,146,598) (688,727)
Payment on related party notes receivable -- 199,812
Payment on deposit (4,086) --
Payment on option to acquire site (10,000) --
Net cash acquired in acquisition of Kinergy, ReEnergy and Accessity 1,146,854 --
Costs associated with share exchange transaction (307,808) (265,217)
------------ ------------
Net cash used in investing activities (6,321,638) (754,132)
------------ ------------
Cash flows from Financing Activities:
Proceeds from sale of stock, net 18,879,749 846,855
Proceeds from exercise of stock options 447,669 92
Receipt of stockholder receivable 67,500 --
------------ ------------
Net cash provided by financing activities 19,394,918 846,947
------------ ------------
Net increase (decrease) in cash and cash equivalents 11,343,992 (28,176)
Cash and cash equivalents at beginning of period 42 249,084
------------ ------------
Cash and cash equivalents at end of period $ 11,344,034 $ 220,908
============ ============

See accompanying notes to condensed consolidated financial statements.

F-5

PACIFIC ETHANOL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (CONT'D)
(UNAUDITED)

Non-Cash Financing and Investing activities:
Conversion of debt to equity $ 1,245,000 $ 240,000
============ ============
Issuance of stock for receivable $ -- $ 68,100
============ ============
Purchase of ReEnergy with Stock $ 316,250 $ --
============ ============
Shares contributed by stockholder in purchase of ReEnergy $ 506,000 $ --
============ ============
Shares contributed by stockholder in purchase of Kinergy $ 1,012,000 $ --
============ ============
Purchase of Kinergy with Stock $ 9,803,750 $ --
============ ============
Stock returned to the Company as payment for stock option exercise $ 1,213,314 $ --
============ ============

See accompanying notes to condensed consolidated financial statements.

F-6

PACIFIC ETHANOL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)

1. REPORT BY MANAGEMENT:
--------------------

The condensed consolidated financial statements include the accounts of
Pacific Ethanol, Inc., a Delaware corporation, and its wholly-owned
subsidiaries (collectively, the "Company"). All significant transactions
among the consolidated entities have been eliminated upon consolidation.

The condensed consolidated financial statements have been prepared by the
Company and include all adjustments consisting of only normal recurring
adjustments which are, in the opinion of management, necessary for a fair
presentation of the financial position of the Company as of September 30,
2005 and the results of operations and the cash flows of the Company for
the three and nine months ended September 30, 2005 and 2004, pursuant to
the rules and regulations of the Securities and Exchange Commission.
Accordingly, the condensed consolidated financial statements do not include
all of the information and footnotes required by accounting principles
generally accepted in the United States of America for annual consolidated
financial statements. The Company's results of operations for the nine
months ended September 30, 2005 are not necessarily indicative of the
results of operations to be expected for the full fiscal year ending
December 31, 2005.

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.

STOCK-BASED COMPENSATION - As permitted under Statement of Financial
Accounting Standards No. 123 ( FAS 123), Accounting for Stock-Based
Compensation, the Company has elected to follow Accounting Principles Board
Opinion No. 25 (APB No. 25), Accounting for Stock Issued to Employees in
accounting for stock-based awards to its employees and directors.
Accordingly, the Company accounts for grants of stock options to its
employees and directors according to the intrinsic value method and, thus,
recognizes no stock-based compensation expense for options granted with
exercise prices equal to or greater than the fair value of the Company's
common stock on the date of grant. The Company records deferred stock-based
compensation when the market of the Company's common stock exceeds the
exercise price of the stock options or purchase rights on the measurement
date (generally, the date of grant). Any such deferred stock-based
compensation is amortized ratably over the vesting period of the individual
options.

Options granted to non-employees are accounted for at fair value using the
Black-Scholes Option Valuation Model in accordance with FAS 123 and
Emerging Issues Task Force Consensus No. 96-18, and are subject to periodic
revaluation over their vesting terms. The resulting stock-based
compensation expense is recorded over the service period in which the
non-employee provides services to the Company.

Pro forma net loss information using the fair value based method of
accounting for grants of stock options to employees and directors is
included in the table shown below for the three months and nine months
ended September 30, 2005 and 2004:

F-7

Three Months Nine Months
Ended September 30, Ended September 30,
------------------------------ ------------------------------
2005 2004 2005 2004
------------- ------------- ------------- -------------

Net loss attributable to common
stockholders, as reported $ (922,584) $ (784,257) $ (4,806,345) $ (1,992,945)
============= ============= ============= =============
Add: stock-based employee
compensation cost included in
determination of net loss 68,456 -- 68,456 --
Deduct: fair value compensation
cost under FAS 123 (507,825) -- (507,825) --
------------- ------------- ------------- -------------
Pro forma net loss
$ (1,361,953) $ (784,257) $ (5,245,714) $ (1,992,945)
============= ============= ============= =============
Loss per share:

Weighted average shares outstanding,
as reported $ (0.03) $ (0.06) $ (0.20) $ (0.17)
============= ============= ============= =============
Weighted average shares outstanding,
pro forma $ (0.05) $ (0.06) $ (0.22) $ (0.17)
============= ============= ============= =============

Fair market value of stock-based compensation has been estimated using the
Black-Scholes option pricing model. Inputs into the pricing model include
the underlying stock price at the time of fair market value measurement,
the exercise price of the granted options, the remaining time to expiration
from the date of grant, the underlying stock's estimated annualized
volatility, and a discount rate based on the ten year treasury note yield.
Annualized volatility has been estimated under the guidelines of FAS 123
and is based on the variance of historical returns of an appropriate proxy
company.

REVENUE RECOGNITION - The Company recognizes revenue in accordance with SEC
Staff Accounting Bulletin No. 104, Revenue Recognition, and the related
Emerging Task Force Issue No. EITF 99-19, Reporting Revenue Gross as a
Principal Versus Net as an Agent, or EITF 99-19.

The Company derives revenue primarily from sales of ethanol. The Company's
sales are based upon written agreements or purchase orders that identify
the amount of ethanol to be purchased and the purchase price. Revenue is
recognized, gross, upon delivery of ethanol to a customer's designated
ethanol tank. Shipments are made to customers, variously, directly from
suppliers and from the Company's inventory to the Company's customers by
truck or rail. Ethanol that is shipped by rail originates primarily in the
Midwest and takes from 10 to 14 days from date of shipment to be delivered
to the customer or to one of four terminals in California and Oregon. For
local deliveries the product is shipped by truck and delivered the same day
as shipment

In accordance with the criteria outlined in EITF 99-19, the Company records
ethanol sales revenue at gross. The Company generally takes title to the
ethanol, has the contractual obligation to deliver ethanol that meets
certain specifications (hence to determine the nature, type,
characteristics, or specifications of the product or services ordered by
the customer), negotiates the price of the ethanol, is responsible for
assuring fulfillment of the amount to be delivered, selects the supplier
and makes the decision as to which available inventory is matched to which
sales fulfillment (not always the same customer) and assumes credit risk
for the amount billed to the customer. The presence of the combination of
these factors indicates that the Company has the risks and rewards of a
principal in these transactions and therefore the Company records revenue
at the gross amount.

F-8

2. ORGANIZATION AND NATURE OF OPERATIONS:
-------------------------------------

SHARE EXCHANGE TRANSACTION - On March 23, 2005, the Company completed a
share exchange transaction with the shareholders of Pacific Ethanol, Inc.,
a California corporation that was incorporated on January 30, 2003 ("PEI
California"), and the holders of the membership interests of each of
Kinergy Marketing, LLC, an Oregon limited liability company that was
organized on September 13, 2000 ("Kinergy") and ReEnergy, LLC, a California
limited liability company that was organized on March 7, 2001 ("ReEnergy"),
pursuant to which the Company acquired all of the issued and outstanding
capital stock of PEI California and all of the outstanding membership
interests of Kinergy and ReEnergy (the "Share Exchange Transaction"). In
connection with the Share Exchange Transaction, the Company issued an
aggregate of 20,610,987 shares of common stock to the shareholders of PEI
California, 3,875,000 shares of common stock to the sole limited liability
company member of Kinergy and an aggregate of 125,000 shares of common
stock to the limited liability company members of ReEnergy.

Immediately prior to the consummation of the Share Exchange Transaction,
the Company's predecessor, Accessity Corp., a New York corporation
("Accessity"), reincorporated in the State of Delaware under the name
"Pacific Ethanol, Inc" through a merger of Accessity with and into its
then-wholly-owned Delaware subsidiary named Pacific Ethanol, Inc., which
was formed for the purpose of effecting the reincorporation (the
"Reincorporation Merger"). In connection with the Reincorporation Merger,
the shareholders of Accessity became stockholders of the Company and the
Company succeeded to the rights, properties and assets and assumed the
liabilities of Accessity.

Immediately prior to the consummation of the share exchange transaction,
Accessity divested its two operating subsidiaries. Accordingly, effective
as of the closing of the share exchange transaction, Accessity did not have
any ongoing business operations. Assets consisting primarily of cash and
cash equivalents totaling approximately $3.7 million were acquired and
certain current liabilities of approximately $300,000 were assumed from
Accessity. Since Accessity had no operations and only net monetary assets,
the Share Exchange Transaction is being treated as a capital transaction,
whereby Pacific Ethanol acquired the net monetary assets of Accessity,
accompanied by a recapitalization of Pacific Ethanol. As such, no fair
value adjustments were necessary for any of the assets acquired or
liabilities assumed.

The Share Exchange Transaction has been accounted for as a reverse
acquisition whereby PEI California is deemed to be the accounting acquiror.
As a result, the Company's results of operations for the three and nine
months ended September 30, 2004 consist only of the operations of PEI
California. The Company has consolidated the results of PEI California,
Kinergy and ReEnergy beginning March 23, 2005, the date of the Share
Exchange Transaction. Accordingly, the Company's results of operations for
the three and nine months ended September 30, 2005 consist of the
operations of PEI California for the entire nine month period and the
operations of the Company, Kinergy and ReEnergy from March 23, 2005 through
September 30, 2005.

F-9

The following table summarizes the unaudited assets acquired and
liabilities assumed in connection with the Share Exchange Transaction:

Current assets.............................. $ 7,014,196
Property, plant and equipment............... 6,224
Intangibles, including goodwill............. 10,935,750
-------------
Total assets acquired................... 17,956,170
Current liabilities......................... 4,253,177
Other liabilities........................... 83,017
-------------
Total liabilities assumed............... 4,336,194
-------------
Net assets acquired......................... $ 13,619,976
=============
Shares of common stock issued............... 6,489,414
=============

The purchase price represented a significant premium over the recorded net
worth of the acquired entities' assets. In deciding to pay this premium,
the Company considered various factors, including the value of Kinergy's
trade name, Kinergy's extensive market presence and history, Kinergy's
industry knowledge and expertise, Kinergy's extensive customer
relationships and expected synergies among Kinergy's and ReEnergy's
businesses and assets and the Company's planned entry into the ethanol
production business.

In connection with the Share Exchange Transaction and the Company's
acquisition of Kinergy and ReEnergy, the Company engaged a valuation firm
to determine what portion of the purchase price should be allocated to
identifiable intangible assets. Through that process, the Company has
estimated that for Kinergy, the distribution backlog is valued at $136,000,
the customer relationships are valued at $5,600,000 and the trade name is
valued at $3,100,000. The Company made a $150,000 cash payment and issued
stock valued at $316,250 for the acquisition of ReEnergy. In addition,
certain stockholders sold stock to the members of ReEnergy, increasing the
purchase price by $506,000 (see further discussion below). The purchase
price for ReEnergy totaled $972,250. Of this amount, $120,000 was recorded
as an intangible asset for the fair value of a favorable option to acquire
land and because the acquisition of ReEnergy was not deemed to be an
acquisition of a business, the remaining purchase price of $852,250 was
recorded as an expense for services rendered in connection with a
feasibility study. The Company issued stock valued at $9,803,750 for the
acquisition of Kinergy. In addition, certain stockholders sold stock to the
sole member of Kinergy and a related party, increasing the purchase price
by $1,012,000. The purchase price for Kinergy totaled $10,815,750. Goodwill
directly associated with the Kinergy acquisition therefore totaled
$1,979,750.

The Kinergy trade name is determined to have an indefinite life and
therefore, rather than being amortized, will be periodically tested for
impairment. The distribution backlog has an estimated life of six months
and customer relationships were estimated to have a ten-year life and, as a
result, will be amortized accordingly, unless otherwise impaired at an
earlier time. The ReEnergy land option expires on December 15, 2005 and
will be expensed at that time if not extended.

The following table summarizes, on an unaudited pro forma basis, the
combined results of operations of the Company, as though the acquisitions
occurred as of January 1, 2004. The pro forma amounts give effect to
appropriate adjustments for amortization of intangible assets and income
taxes. The pro forma amounts presented are not necessarily indicative of
future operating results.

F-10

Nine Months
Ended September 30,
----------------------------
2005 2004
------------ ------------
Net sales $ 75,135,987 $ 56,545,947
============ ============
Net loss $ (4,979,401) $ (3,273,338)
============ ============
Loss per share of common stock
Basic and diluted $ (0.18) $ (0.13)
============ ============

On April 1, 2004, certain founders of the Company agreed to sell an
aggregate of 500,000 shares of the Company's common stock owned by them to
Cagan McAfee Capital Partners, LLC ("CMCP") at $0.01 per share for securing
financing to close the Share Exchange Transaction on or prior to March 31,
2005. Immediately prior to the closing of the Share Exchange Transaction,
the founders sold these shares at the agreed upon price to CMCP. The
contribution of these shares is accounted for as a capital contribution.
However, because the shares were issued as a finder's fee in a private
offering (see note 5), the related expense is offset against the proceeds
received, resulting in no effect on equity.

Immediately prior to the closing of the Share Exchange Transaction, certain
stockholders of the Company sold an aggregate of 250,000 shares of the
Company's common stock owned by them to the then-Chief Executive Officer of
Accessity at $0.01 per share to compensate him for facilitating the closing
of the Share Exchange Transaction. The contribution of these shares is
accounted for as a capital contribution. However, because the shares are
deemed issued to Accessity in connection with the Share Exchange
Transaction, the related expense is offset against the cash received from
Accessity, resulting in no effect on equity.

Immediately prior to the closing of the Share Exchange Transaction, William
L. Jones, the Company's Chairman of the Board of Directors, sold 200,000
shares of the Company's common stock to the individual members of ReEnergy
at $0.01 per share, to compensate them for facilitating the closing of the
Share Exchange Transaction. The contribution of these shares resulted in an
additional expense of $506,000 for services rendered in connection with a
feasibility study.

Immediately prior to the closing of the Share Exchange Transaction, William
L. Jones sold 300,000 shares of the Company's common stock to Neil M.
Koehler, the sole member of Kinergy and an officer and director of the
Company, at $0.01 per share to compensate him for facilitating the closing
of the Share Exchange Transaction. The contribution of these shares
resulted in additional Kinergy goodwill of $759,000.

Immediately prior to the closing of the Share Exchange Transaction, William
L. Jones sold 100,000 shares of the Company's common stock to Tom Koehler,
a member of ReEnergy and a related party of the sole member of Kinergy, at
$0.01 per share to compensate him for facilitating the closing of the Share
Exchange Transaction. The contribution of these shares resulted in
additional Kinergy goodwill of $253,000.

3. RELATED PARTY NOTES PAYABLE:
---------------------------

On January 10, 2005 and February 22, 2005, William L. Jones advanced the
Company $60,000 and $20,000, respectively, at 5% interest, due and payable
upon the closing of the Share Exchange Transaction. The accumulated
principal due was repaid on March 24, 2005 and the related accrued interest
was paid on April 15, 2005.

F-11

On January 10, 2005, Neil M. Koehler advanced the Company $100,000 at 5%
interest, due and payable upon the closing of the Share Exchange
Transaction. The principal was repaid on March 24, 2005 and the related
accrued interest was paid on April 15, 2005.

On January 31, 2005, Eric McAfee, a principal of CMCP, advanced the Company
$100,000 at 5% interest, due and payable upon close of the Share Exchange
Transaction. The principal was repaid on March 24, 2005 and the related
accrued interest was paid on April 15, 2005.

During 2004, on July 31, September 24, and November 15, Lyles Diversified,
Inc. ("LDI") converted $150,000, $90,000 and $15,000 of debt into 100,000,
60,000 and 10,000 shares of common stock, respectively, at a conversion
price equal to $1.50 per share. During 2005, on January 14, February 4,
March 10, and May 27, LDI converted $36,000, $114,000, $97,682 and $997,318
of debt into 24,000, 76,000, 65,121 and 664,879 shares of the Company's
common stock, respectively, at a conversion price equal to $1.50 per share.
The total debt converted by LDI as of September 30, 2005 was $1,500,000 for
1,000,000 shares of the Company's common stock, at a conversion price equal
to $1.50 per share.

Pursuant to the terms of the Share Exchange Transaction, Kinergy
distributed to its sole member in the form of a promissory note in the
amount of $2,095,614, Kinergy's net worth as set forth on Kinergy's balance
sheet prepared in accordance with GAAP, as of March 23, 2005. A holdback
amount of $100,000 for 30 days was provided to allow Kinergy to settle its
accounts. In April 2005, Kinergy paid the balance of its net worth, up to
the holdback amount of $100,000. The remaining holdback amount was paid in
May 2005.

Pursuant to the terms of the Share Exchange Transaction, ReEnergy
distributed to its members in the form of a promissory note in the amount
of $1,439 ReEnergy's net worth as set forth on ReEnergy's balance sheet
prepared in accordance with GAAP, as of March 23, 2005. The note balance
was paid in April 2005.

4. COMMON STOCK:
------------

SHARE EXCHANGE TRANSACTION - In connection with the Share Exchange
Transaction, the Company issued an aggregate of 20,610,987 shares of common
stock to the shareholders of PEI California, 3,875,000 shares of common
stock to the sole limited liability company member of Kinergy and an
aggregate of 125,000 shares of common stock to the limited liability
company members of ReEnergy.

PRIVATE OFFERING - On March 23, 2005, PEI California issued to 63
accredited investors in a private offering an aggregate of 7,000,000 shares
of common stock at a purchase price of $3.00 per share, two-year investor
warrants to purchase 1,400,000 shares of common stock at an exercise price
of $3.00 per share and two-year investor warrants to purchase 700,000
shares of common stock at an exercise price of $5.00 per share, for total
gross proceeds of approximately $21,000,000. PEI California paid cash
placement agent fees and expenses of approximately $1,850,400 and issued
five-year placement agent warrants to purchase 678,000 shares of common
stock at an exercise price of $3.00 per share in connection with the
offering. Additional costs related to the financing include legal,
accounting, consulting, and stock certificate issuance fees that totaled
approximately $272,366 through September 30, 2005.

F-12

with Rule 461 promulgated under the Securities Act of 1933, within five
trading days of the date that the Company is notified (orally or in
writing, whichever is earlier) by the Securities and Exchange Commission
that the Registration Statement will not be "reviewed," or is not subject
to further review, or (iii) the Registration Statement filed or required to
be filed under the Registration Rights Agreement is not declared effective
by the Securities and Exchange Commission on or before 225 days following
March 23, 2005, or (iv) after the Registration Statement is first declared
effective by the Securities and Exchange Commission, it ceases for any
reason to remain continuously effective as to all securities registered
thereunder, or the holders of such securities are not permitted to utilize
the prospectus contained in the Registration Statement to resell such
securities, for more than an aggregate of 45 trading days during any
12-month period (which need not be consecutive trading days) (any such
failure or breach being referred to as an "Event," and for purposes of
clause (i) or (iii) the date on which such Event occurs, or for purposes of
clause (ii) the date on which such five-trading day period is exceeded, or
for purposes of clause (iv) the date on which such 45-trading day-period is
exceeded being referred to as "Event Date"), then in addition to any other
rights the holders of such securities may have under the Registration
Statement or under applicable law, then, on each such Event Date and on
each monthly anniversary of each such Event Date (if the applicable Event
shall not have been cured by such date) until the applicable Event is
cured, the Company is required to pay to each such holder an amount in
cash, as partial liquidated damages and not as a penalty, equal to 2.0% of
the aggregate purchase price paid by such holder pursuant to the Securities
Purchase Agreement relating to such securities then held by such holder. If
the Company fails to pay any partial liquidated damages in full within
seven days after the date payable, the Company is required to pay interest
thereon at a rate of 18% per annum (or such lesser maximum amount that is
permitted to be paid by applicable law) to such holder, accruing daily from
the date such partial liquidated damages are due until such amounts, plus
all such interest thereon, are paid in full. The partial liquidated damages
are to apply on a daily pro-rata basis for any portion of a month prior to
the cure of an Event.

The Registration Rights Agreement also provides for customary piggy-back
registration rights whereby holders of shares of the Company's common
stock, or warrants to purchase shares of common stock, can cause the
Company to register such shares for resale in connection with the Company's
filing of a Registration Statement with the Securities and Exchange
Commission to register shares in another offering. The Registration Rights
Agreement also contains customary representations and warranties, covenants
and limitations.

The Registration Statement was not declared effective by the Securities and
Exchange Commission on or before 225 days following March 23, 2005. The
Company endeavored to have all security holders entitled to these
registration rights execute amendments to the Registration Rights Agreement
reducing the penalty from 2.0% to 1.0% of the aggregate purchase price paid
by such holder pursuant to the Securities Purchase Agreement relating to
such securities then held by such holder. This penalty reduction applies to
penalties accrued on or prior to January 31, 2006 as a result of the
related Registration Statement not being declared effective by the
Securities and Exchange Commission. Certain of the security holders
executed this amendment. However, not all security holders executed this
amendment and as a result, the Company paid an aggregate of $298,050 in
penalties on November 8, 2005, which will be recorded in the quarterly
period ending December 31, 2005.

STOCK OPTIONS - One outstanding option granted to an employee of the
Company to acquire 25,000 shares of common stock vested on March 23, 2005
and was converted into a warrant. Non-cash compensation expense of $232,250
was recognized to record the fair value of the warrant.

F-13

On July 26, 2005, the Company issued options to purchase an aggregate of
17,500 shares of the Company's common stock at an exercise price equal to
$7.01 per share, which exercise price equals 85% of the closing price per
share of the Company's common stock on that date. The options vested upon
issuance and expire 10 years following the date of grant. A non-cash charge
of $21,656 will be recorded in the quarter ended September 30, 2005.

On July 26, 2005, the Company granted options to purchase an aggregate of
115,000 shares of the Company's common stock at an exercise price equal to
$8.25, the closing price per share of the Company's common stock on that
date, to various non-employee directors. The options vest one year
following the date of grant and expire 10 years following the date of
grant.

On July 28, 2005, the Company granted options to purchase an aggregate of
30,000 shares of the Company's common stock at an exercise price equal to
$8.30, the closing price per share of the Company's common stock on that
date, to two new non-employee directors. The options vest one year
following the date of grant and expire 10 years following the date of
grant.

On August 10, 2005, the Company granted options to purchase an aggregate of
425,000 shares of the Company's common stock at an exercise price equal to
$8.03, the closing price per share of the Company's common stock on the day
immediately preceding that date, to its Chief Financial Officer. The
options vested as to 85,000 shares immediately and 85,000 shares will vest
on each of the next four anniversaries of the date of grant. The options
expire 10 years following the date of grant.

On August 10, 2005, the Company granted options to purchase an aggregate of
75,000 shares of the Company's common stock at an exercise price equal to
$8.03, the closing price per share of the Company's common stock on the day
immediately preceding that date, to a consultant. The options vested as to
15,000 shares immediately and 15,000 shares will vest on each of the next
four anniversaries of the date of grant. The options expire 10 years
following the date of grant. A non-cash charge of $70,500 was recorded in
the quarter ended September 30, 2005.

On September 1, 2005, the Company granted options to purchase an aggregate
of 160,000 shares of the Company's common stock at an exercise price equal
to $6.63 per share, which exercise price equals 85% of the closing price
per share of the Company's common stock on the day immediately preceding
that date. A non-cash charge of $46,800 was recorded in the quarter ended
September 30, 2005 and will be recorded on the dates of additional vesting
occurring on each of the next three anniversaries of the date of grant. The
options expire 10 years following the date of grant.

STOCK ISSUANCE - The Company issued an aggregate of 70,000 shares of common
stock to two employees of the Company on their date of hire on June 23,
2005. Non-cash compensation expense of $651,000 was recognized to record
the fair value of shares of common stock.

NON-CASH COMPENSATION - On February 12, 2004, the Company entered into a
consulting agreement with an unrelated party to represent the Company in
investors' communications and public relations with existing shareholders,
brokers, dealers and other investment professionals as to the Company's
current and proposed activities. As compensation for such services, the
Company issued warrants to the consultant to purchase 920,000 shares of the
Company's common stock. These warrants vested upon the effective date of
the agreement and were recognized at the fair value on the date of issuance
in the amount of $1,380,000. The Company recorded non-cash expense of
$172,500 and $517,500 for consulting services during the nine months ended
September 30, 2005 and 2004, respectively.

F-14

Pursuant to the consulting agreement, upon completion of the Share Exchange
Transaction, the Company issued warrants to the consultant to purchase
230,000 additional shares of common stock that will vest ratably over a
period of two years. The warrants were recognized at the fair value as of
the start of business on March 24, 2005 in the amount of $2,139,000 and
recorded as contra-equity. The Company recorded non-cash expense of
$555,261 for consulting services vested during the period from March 24,
2005 to September 30, 2005. The unvested warrants in the amount of
$1,583,739 will vest ratably at $89,125 per month over the remainder of the
two year period.

5. COMMITMENTS AND CONTINGENCIES:
-----------------------------

OPERATING LEASES - The Company leases shared office space in Fresno,
California on a month-to-month basis at $4,132 per month. The related
office rent expense was $32,076 and $17,648 for the nine months ended
September 30, 2005 and 2004, respectively.

The Company leases office space in Davis, California at a rate of $1,100
per month. The lease term expires on November 30, 2005.

The Company entered into a lease for office space in Portland, Oregon on
August 3, 2005. The term of the lease is three years, commencing December
1, 2005 through November 30, 2008 with monthly lease payments of $1,290
through May 31, 2007 and $1,362 from June 1, 2007 through the end of the
lease term.

ADVISORY FEE - On April 14, 2004, the Company entered into an agreement
with CMCP in connection with raising funding for an ethanol production
facility. The agreement provided that upon raising a minimum of $15,000,000
the Company would pay CMCP a fee, through that date, equal to $10,000 per
month starting from April 15, 2003. In addition, the agreement provided for
payment of $25,000 per month for a minimum of 12 months upon the completion
of a merger between the Company and a public company, starting from the
date of close of such merger, as well as an advisory fee of 3% of any
equity amount raised through the efforts of CMCP, including cash amounts
received through a merger with another corporate entity. The Company paid
an advisory fee to CMCP in the amount of $235,000 on March 24, 2005,
pursuant to the terms of the agreement between CMCP and the Company and in
connection with the private placement transaction described above. In
addition, $83,017 was paid related to cash received from Accessity in
connection with the Share Exchange Transaction.

The Company terminated the consulting agreement on November 1, 2005 and
paid CMCP $150,000 for the remainder of their contract for a total of
$300,000 paid in 2005 related to this consulting agreement.

On January 5, 2005, the Company entered into an agreement with Northeast
Securities, Inc. ("NESC") and Chadbourn Securities, Inc. ("Chadbourn"), a
related party, in connection with the private offering on March 23, 2005
described above. The agreement provides that upon completion of a financing
within the time-frame of the engagement covered by the agreement, the
Company will pay NESC 6% (plus a 1% non-accountable expense allowance) of
gross proceeds received by the Company, and warrants exercisable at the
offering price in an amount equal to 7% of the aggregate number of shares
of common stock sold in the financing. In addition, the agreement provides
that Chadbourn will receive 2% (plus a 1% non-accountable expense
allowance) of gross proceeds and warrants exercisable at the offering price
in an amount equal to 3% of the aggregate number of shares of common stock
sold in the financing. Pursuant to the terms of the agreement and in
connection with the completion of the private offering described above, the
Company paid NESC $1,168,800, (net of a reduction of $183,600, as agreed on
March 18, 2005), and issued to NESC placement warrants to purchase 450,800
shares of the Company's common stock exercisable at $3.00 per share. The
Company also paid Chadbourn $627,600 and issued to Chadbourn placement
warrants to purchase 212,700 shares of the Company's common stock
exercisable at $3.00 per share.

F-15

In April 2005, the Company entered into a consulting agreement in the
amount of $180,000 with NESC. Under the terms of the agreement, the Company
paid an initial payment of $30,000 and will continue to make monthly
payments of $12,500 through April 1, 2006.

ETHANOL PURCHASE AND MARKETING AGREEMENT - On March 4, 2005, Kinergy
entered into an Ethanol Purchase and Marketing Agreement with the owner of
an ethanol production facility. The agreement is effective for two years
with automatic renewals for additional one-year periods thereafter unless a
party to the agreement delivers written notice of termination at least 60
days prior to the end of the original or renewal term. Under the agreement,
Kinergy is to provide denatured fuel ethanol marketing services for the
production facility. Kinergy is to have the exclusive right to market and
sell all of the ethanol from the facility, an estimated 20 million
gallons-per-year. Kinergy is to pay the owner the gross payments received
by Kinergy from third parties for forward sales of ethanol less certain
transaction costs and fees. From the gross payments, Kinergy may deduct
transportation costs and expenses incurred by or on behalf of Kinergy in
connection with the marketing of ethanol pursuant to the agreement,
including truck, rail and terminal fees for the transportation of the
facility's ethanol to third parties and may also deduct and retain a 1.0%
marketing fee calculated after deducting these costs and expenses.

CONSULTING AGREEMENT- On April 27, 2005, the Company engaged a consulting
firm to explore capital raising alternatives. The Company paid the
consulting firm an initial engagement fee of $300,000 upon execution of its
engagement agreement. The engagement agreement also requires an additional
engagement fee, the amount of which is dependent upon the number of the
Company's projects to be financed. The additional engagement fee has a
range of a minimum of $300,000 and a maximum of one-half of one percent
(1/2%) of the capital raised, and is payable upon the occurrence of certain
events. In addition, the Company is obligated to pay to the consulting firm
an arrangement fee of three percent (3%) of the capital raised, which
amount is payable upon the closing of the financing transaction. If,
however, the capital raised finances only one Company project and the
consulting firm arranges additional financing to finance another Company
project, the arrangement fee under the second financing is to be three and
one-half percent (3.5%) but there shall be no additional engagement fee for
the second financing. The Company is also to pay to the consulting firm an
annual administration fee of $75,000 if one Company project is financed and
$100,000 if two Company projects are financed, which amounts are payable
for each year during which debt financing raised by the consulting firm is
outstanding.

EMPLOYMENT AGREEMENT - On August 10, 2005, the Company entered into an
Executive Employment Agreement with William G. Langley, its Chief Financial
Officer, that provides for a four-year term and automatic one-year renewals
thereafter, unless either Mr. Langley or the Company provides written
notice to the other at least 90 days prior to the expiration of the
then-current term. Mr. Langley is to receive a base salary of $185,000 per
year. Mr. Langley is entitled to six months of severance pay effective
throughout the entire term of his agreement and is also entitled to
reimbursement of his costs associated with his relocation to Fresno,
California. Mr. Langley is obligated to relocate to Fresno, California
within six months of the date of his Executive Employment Agreement.

F-16

RESOURCES AGREEMENT - Effective August 10, 2005, the Company entered into a
resources agreement with Tatum CFO Partners ("Tatum") relating to the
Executive Employment Agreement with William G. Langley, its Chief Financial
Officer, whereby the Company agreed to pay as compensation for resources to
be provided by Tatum, a lump sum signing fee of $69,375 and $1,000 per
month during the term of the Resources Agreement, which remains in effect
for the duration of Mr. Langley's employment with the Company. In addition,
on August 10, 2005, the Company granted options to purchase an aggregate of
75,000 shares of the Company's common stock at an exercise price equal to
$8.03, the closing price per share of the Company's common stock on the day
immediately preceding that date, to Tatum CFO Partners. The agreement
requires that of the options to be issued in the future, if any, to William
G. Langley, the Company's Chief Financial Officer, 15% of such options are
to be issued to Tatum.

ETHANOL MARKETING AGREEMENT - On August 31, 2005, Kinergy entered into an
Ethanol Marketing Agreement with the owner of an ethanol production
facility. The agreement is effective for three years with automatic
renewals for additional one-year periods thereafter unless a party to the
agreement delivers written notice of termination at least 60 days prior to
the end of the original or renewal term. Under the agreement, Kinergy is to
provide denatured fuel ethanol marketing services for the production
facility. Kinergy is to have the exclusive right to market and sell all of
the ethanol from the facility, an estimated 40 million gallons-per-year.
Kinergy is to pay the owner the gross payments received by Kinergy from
third parties for forward sales of ethanol (the "Purchase Price") less
certain transaction costs and fees. From the Purchase Price, Kinergy may
deduct all reasonable out-of-pocket and documented costs and expenses
incurred by or on behalf of Kinergy in connection with the marketing of
ethanol pursuant to the agreement, including truck, rail and terminal costs
for the transportation and storage of the facility's ethanol to third
parties and reasonable, documented out-of-pocket expenses incurred in
connection with the negotiation and documentation of sales agreements
between Kinergy and third parties (the "Transaction Costs"). From the
Purchase Price, Kinergy may also deduct and retain the product of 1.0%
multiplied by the difference between the Purchase Price and the Transaction
Costs. In addition, Kinergy is to split the profit from any logistical
arbitrage associated with ethanol supplied by the facility.

OPTION TO ACQUIRE LAND - On August 22, 2005, the Company entered into an
Option Agreement to acquire approximately 60 acres of unimproved real
property at a purchase price of $7,500 per acre, for the purpose of
developing an ethanol plant. The Company paid $50,000 as option
consideration on the grant date and an additional $100,000 will be due on
the 1st and 2nd anniversary dates of the grant date. The option payments
will be applied to the purchase price in the event the option is exercised.
The Company must make additional quarterly non-refundable option payments
of 2.5% of the total anticipated purchase price less option payment(s) made
to date until the option is exercised or expired. This option expires on
August 21, 2008.

OPTION TO LEASE - On August 17, 2005, the Company entered into a Letter of
Intent for an option to lease approximately 25 acres for the purpose of
developing an ethanol plant. The term of the option is for a period of one
year, beginning August 10, 2005. The Company paid $10,000 as consideration
for the option.

6. SUBSEQUENT EVENTS:
-----------------

PURCHASE AGREEMENT - On August 10, 2005, the Company entered into a
Membership Interest Purchase Agreement with certain holders of a limited
liability company under which the Company intended to purchase all of the
outstanding membership interests of the limited liability company. The
limited liability company is the owner of a newly-constructed ethanol
production facility in Goshen, California that is undergoing initial
start-up testing. The purchase price, subject to certain adjustments, was

F-17

$48 million, payable in approximately $31 million in cash, the assumption
of approximately $9 million in debt and the issuance by the Company to the
members of the limited liability company of an aggregate of $8 million in
convertible subordinated promissory notes. To the extent that debt actually
assumed by the Company was greater or less than $9 million, the cash
payment of approximately $31 million was to be reduced or increased,
respectively, by an equal amount. The closing of the transaction was
subject to the satisfaction of certain conditions, including the securing
by the Company of all funding necessary to finance the transaction,
satisfactory results of the Company's due diligence and the Company's
ability to obtain the agreement of all members of the limited liability
company. The agreement was to terminate automatically in the event that the
closing of the purchase transaction did not occur by the earlier of October
15, 2005 and the sixtieth day following the satisfaction of a certain
ethanol production milestone.

The deadline for the closing of the transaction contemplated by the
agreement was October 15, 2005. This deadline was not met and was not
waived by any party to the agreement; accordingly, the agreement terminated
automatically on October 15, 2005.

OPTION TO LEASE - On October 5, 2005, the Company entered into an Agreement
of Option to Lease approximately 15 acres for the purpose of developing an
ethanol plant. The Company paid a $5,000 refundable option deposit and
$5,000 non-refundable option payment to be credited to the first payment(s)
of base rent payable under the lease. The parties have 60 days from the
date of the option agreement to finalize the terms and conditions of the
lease. The option expires on January 30, 2006 if the Company does not
extend the option per the terms of the agreement.

LOAN REVISION/EXTENSION AGREEMENT - On November 1, 2005, Kinergy executed a
Loan Revision/Extension Agreement (the "Agreement") dated October 4, 2005
with Comerica Bank. The Agreement is effective as of June 20, 2005 and
relates to a Master Revolving Note dated September 24, 2004 in the amount
of $2 million, as further described below. Under the Agreement, the
maturity date of the Master Revolving Note was extended from October 5,
2005 to October 5, 2006. As of the execution date of the Agreement, no
amounts were owed to Comerica under the Master Revolving Note. Principal
amounts outstanding under the Note accrue interest, on a per annum basis,
at the prime rate of interest plus 1.0%.

In connection with the Revision/Extension Agreement, certain other
agreements were also entered into with Comerica by Kinergy and the Company.
A Letter Agreement provides for the delivery by Kinergy of certain
financial documents and includes certain financial covenants and
limitations. In addition, Kinergy is obligated to provide to Comerica
annual audited financial statements and quarterly financial statements as
well as quarterly accounts receivable and accounts payable ageing reports.
A Guaranty dated October 4, 2005 in favor of Comerica was executed by the
Company and relates to the Agreement and the Master Revolving Note
described above and any other obligations of Kinergy to Comerica. Under the
Guaranty, the Company guarantees payment and performance of all
indebtedness and obligations of Kinergy to Comerica. A Security Agreement
dated as of September 24, 2004 was executed by Kinergy in favor of Comerica
in connection with Kinergy's indebtedness and obligations under the Master
Revolving Note and other agreements with Comerica. The Security Agreement
grants a continuing security interest and lien to Comerica in certain
collateral comprising essentially all of Kinergy's assets. Kinergy is
obligated to keep the collateral free of all liens, claims and encumbrances
other than those in favor of Comerica.

F-18

AMENDED AND RESTATED PHASE 1 DESIGN-BUILD AGREEMENT - On November 2, 2005,
Pacific Ethanol Madera LLC ("PEI Madera"), a wholly-owned subsidiary of the
Company that was formed in April 2005 as the holding company for the
Company's Madera County facility, entered into an Amended and Restated
Phase 1 Design-Build Agreement (the "Amended Agreement") with a builder
("Builder"). The Amended Agreement amended and restated that certain
Standard Form of Design-Build Agreement and General Conditions dated July
7, 2003 between Builder and PEI California. The Amended Agreement provides
for design and build services to be rendered by Builder to PEI Madera with
respect to an ethanol production facility currently under construction in
Madera County, California (the "Project"). Under the Amended Agreement,
Builder is to operate in a general contractor capacity and procure
engineering and construction services from third parties. The Amended
Agreement stipulates that the engineer for the Project is to be Delta-T
Corporation. The Amended Agreement provides for a guaranteed maximum price
proposal of $15.0 million. However, PEI Madera is liable for additional
costs to the extent that the scope of work actually performed by Builder
exceeds the scope of work that is the basis for the guaranteed maximum
price. In addition, the cost of services performed directly by the engineer
for the Project, Delta-T Corporation, is not included in such guaranteed
maximum price. The completion date of the work contemplated by the Amended
Agreement is to be November 20, 2005.

PEI Madera may terminate the Amended Agreement but must pay Builder for all
costs associated with the work on the Project. If PEI Madera terminates the
Amended Agreement and selects another design-builder, then PEI Madera is to
pay for all costs associated with the work on the Project as well as a $5.0
million premium. PEI Madera is also required to pay Builder fair
compensation for all equipment retained by Builder and PEI Madera is
required to assume all obligations, commitments and unsettled claims that
Builder has undertaken or incurred in good faith in connection with the
work on the Project. In the event that Builder fails to perform any of its
material obligations under the Amended Agreement, PEI Madera may terminate
the Amended Agreement without the obligation to pay the $5.0 million
premium but only after such failure continues for forty-five days following
receipt by Builder of written notice of such failure.

PHASE 2 DESIGN-BUILD AGREEMENT - On November 2, 2005, PEI Madera entered
into a Phase 2 Design-Build Agreement (the "Phase 2 Agreement") with
Builder. The Phase 2 Agreement covers additional work to be performed by
Builder for the completion of the Project. The final completion date of the
work contemplated by the Phase 2 Agreement is five hundred forty-five days
after PEI Madera's notice to Builder to proceed. As of the date of this
report, PEI Madera has not yet delivered its notice to proceed to Builder.
The Phase 2 Agreement provides for a guaranteed maximum price proposal of
approximately $34.0 million. However, PEI Madera is liable for additional
costs to the extent that the scope of work actually performed by Builder
exceeds the scope of work that is the basis for the guaranteed maximum
price. In the event that the total costs and fees for Phase 2 of the
Project are less than the guaranteed maximum price of approximately $34.0
million, then Builder and PEI Madera are to share such difference equally.

Delays in work beyond the substantial completion date not caused by PEI
Madera will result in PEI Madera being entitled to liquidated damages.
These liquidated damages are to be calculated as $23,000 per day multiplied
by one minus the daily operating rate for such day. The daily operating
rate is calculated based on the actual operating capacity for that day
(expressed in millions of gallons per year) divided by thirty-five million
gallons. As an incentive bonus for achieving substantial completion prior
to the specified date, PEI Madera is to pay to Builder $12,500 per day for
each day in advance of such date. Fifty percent of any bonus is payable
within thirty days after substantial completion and the remaining fifty
percent is payable once final completion is achieved. The aggregate amount
of any liquidated damages or incentive bonus is not to exceed $2.5 million.

F-19

LETTER AGREEMENT - On November 2, 2005, PEI California entered into a
Letter Agreement (the "Letter Agreement") with Builder. The Letter
Agreement relates to the Amended Agreement and the Phase 2 Agreement
described above. Under the Letter Agreement, in the event that Builder pays
performance liquidated damages to PEI Madera under the Phase 2 Agreement as
a result of a defect attributable Delta-T Corporation, the engineer for the
Project, or in the event that Builder pays liquidated damages to PEI Madera
under the Phase 2 Agreement as a result of a delay that is attributable to
Delta-T Corporation, then PEI California agrees to reimburse Builder for
such liquidated damages. However, PEI California is not responsible for the
first $2.0 million of reimbursement. In addition, in the event that Builder
recovers amounts from Delta-T Corporation for such defect or delay, then
Builder will not seek reimbursement from PEI California. The aggregate
reimbursement obligations of PEI California under the Letter Agreement are
not to exceed $8.1 million.

CONTINUING GUARANTY (JONES) - On November 3, 2005, William L. Jones, a
related party and the Chairman of the Board of Directors of the Company,
executed a Continuing Guaranty (the "Jones Guaranty") in favor of Builder.
Under the Jones Guaranty, Mr. Jones guarantees to Builder the payment
obligations of PEI California under the Letter Agreement. Under the Jones
Guaranty, Builder is to seek payment on a pro rata basis from Mr. Jones and
Neil M. Koehler (as described below), but in the event that Mr. Koehler
fails to make payment, then Mr. Jones is responsible for any shortfall.
However, the full extent of Mr. Jones' liability under the Jones Guaranty,
including for any shortfall for non-payment by Mr. Koehler, is limited to
$4.0 million plus any attorneys' fees, costs and expenses.

CONTINUING GUARANTY (KOEHLER) - On November 3, 2005, Neil M. Koehler, a
related party and Chief Executive Officer and President and a member of the
Board of Directors of the Company, executed a Continuing Guaranty (the
"Koehler Guaranty") in favor of Builder. Under the Koehler Guaranty, Mr.
Koehler guarantees to Builder the payment obligations of PEI California
under the Letter Agreement. Under the Koehler Guaranty, Builder is to seek
payment on a pro rata basis from Messrs. Jones (as described above) and
Koehler, but in the event that Mr. Jones fails to make payment, then Mr.
Koehler is responsible for any shortfall. However, the full extent of Mr.
Koehler's liability under the Koehler Guaranty, including for any shortfall
for non-payment by Mr. Jones, is limited to $4.0 million plus any
attorneys' fees, costs and expenses.

SERIES A PREFERRED STOCK PURCHASE AGREEMENT - On November 14, 2005, the
Company entered into a Purchase Agreement (the "Purchase Agreement") with
Cascade Investment, L.L.C. (the "Purchaser"). The Purchase Agreement
provides for the sale by the Company and the purchase by the Purchaser of
5,250,000 shares of the Company's Series A Cumulative Redeemable
Convertible Preferred Stock (the "Preferred Stock") for an aggregate
purchase price of $84 million. Of the $84 million aggregate purchase price,
$4 million is payable to the Company at closing and $80 million is to be
deposited into a restricted cash account and disbursed in accordance with a
deposit agreement to be executed at closing. The Company is entitled to use
the initial $4 million of proceeds for general working capital and must use
the remaining $80 million for the construction or acquisition of one or
more ethanol production facilities in accordance with the terms of the
deposit agreement. The closing of the purchase and sale of the Preferred
Stock is subject to numerous customary conditions. The closing is subject
to approval of the transaction by the stockholders of the Company. The
closing is also subject to additional conditions, including appropriate
filings and approvals under the Hart-Scott-Rodino Act of 1976, the
appointment of two persons as members of the Board of Directors of the
Company to be designated by the Purchaser, one of whom is to be appointed
as Chairman of the Compensation Committee of the Board of Directors of the
Company. In addition, the Closing is subject to execution and delivery in
form and substance satisfactory to the Purchaser of agreements relating to
the construction, operation and financing of the Company's Madera County,
California ethanol production facility. An additional condition to the
closing provides that the closing must occur on or before March 31, 2006
unless the Purchaser has extended the closing date.

F-20

VOTING AGREEMENT - On November 14, 2005, William L. Jones, Neil M. Koehler,
Ryan W. Turner, Kenneth J. Friedman and Frank P. Greinke, each of whom is a
director and/or executive officer of the Company (the "Stockholders"), and
the Company, entered into a Voting Agreement (the "Voting Agreement") with
the Purchaser. The Stockholders collectively hold an aggregate of 9,162,704
shares of the Company's common stock. The Voting Agreement provides that
the Stockholders may not transfer their shares of the Company's common
stock, and must keep their shares free of all liens, proxies, voting trusts
or agreements, until the Voting Agreement is terminated. The Voting
Agreement provides that the Stockholders will each vote or execute a
written consent in favor of the transactions contemplated by the Purchase
Agreement (the "Transactions"). In addition, under the Voting Agreement,
each Stockholder grants an irrevocable proxy to Neil M. Koehler to act as
such Stockholder's proxy and attorney-in-fact to vote or execute a written
consent in favor of the Transactions. The Voting Agreement is effective
until the earlier of the approval of the Transactions by the Company's
stockholders or the termination of the Purchase Agreement in accordance
with its terms.

F-21

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

May 23, 2005

To the Stockholders and Board of Directors
Pacific Ethanol, Inc.
Fresno, California

We have audited the consolidated balance sheets of Pacific Ethanol, Inc. (the
"Company") as of December 31, 2004 and 2003 and the related consolidated
statements of operations, stockholders' equity and cash flows for the year ended
December 31, 2004 and for the period from January 30, 2003 (inception) through
December 31, 2003. 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. 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 provided a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Pacific
Ethanol, Inc., as of December 31, 2004 and 2003 and the consolidated results of
its operations and its cash flows for the year ended December 31, 2004 and the
period from January 30, 2003 (inception) through December 31, 2003, in
conformity with U.S. generally accepted accounting principles.

/s/ HEIN & ASSOCIATES LLP

F-22

PACIFIC ETHANOL, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

As of December 31,
2004 2003
----------- -----------
ASSETS
------

CURRENT ASSETS:
Cash and cash equivalents $ 42 $ 249,084
Accounts receivable 8,464 24,188
Inventories -- 1,734
Prepaid expenses 293,115 21,677
Related party notes receivable 5,286 205,035
Business acquisition costs 430,393 --
Other receivables 48,806 305,370
----------- -----------
Total current assets 786,106 807,088

PROPERTY, PLANT AND EQUIPMENT, net 6,324,824 5,664,213

DEBT ISSUANCE COSTS, net 68,333 88,333
----------- -----------

TOTAL ASSETS $ 7,179,263 $ 6,559,634
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

CURRENT LIABILITIES:
Accounts payable $ 383,012 $ 295,957
Accounts payable (related party) 846,211 450,021
Accrued payroll 18,963 13,359
Accrued interest payable 30,864 152,180
Other accrued liabilities 531,803 253,147
----------- -----------
Total liabilities 1,810,853 1,164,664

RELATED-PARTY NOTE PAYABLE 4,012,678 4,027,142

COMMITMENTS AND CONTINGENCIES (Note 9)

STOCKHOLDERS' EQUITY:
Preferred stock, no par value; 30,000,000 shares authorized,
no shares issued and outstanding as of December 31, 2004 and
December 31, 2003 -- --
Common stock, no par value; 30,000,000 shares authorized, 13,445,866
and 11,733,200 shares issued and outstanding as of December 31,
2004 and December 31, 2003, respectively 3,705,078 2,227,507
Additional paid-in capital 1,380,000 --
Due from stockholders (68,100) (1,000)
Accumulated deficit (3,661,246) (858,679)
----------- -----------
Total stockholders' equity 1,355,732 1,367,828
----------- -----------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,179,263 $ 6,559,634
=========== ===========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

F-23

PACIFIC ETHANOL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

From January 30,
For Year Ended 2003 (inception) to
December 31, December 31,
2004 2003
----------------- -----------------
NET SALES $ 19,764 $ 1,016,594

COST OF GOODS SOLD 12,523 946,012
----------------- -----------------

GROSS PROFIT 7,241 70,582

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,070,010 647,731

NONCASH COMPENSATION FOR CONSULTING FEES 1,207,500 --
----------------- -----------------

OPERATING LOSS (2,270,269) (577,149)

OTHER INCOME (EXPENSE)
Other income (2,166) 1,292
Interest expense (528,532) (281,222)
----------------- -----------------
Total other income (expense) (530,698) (279,930)
----------------- -----------------
LOSS BEFORE PROVISION FOR INCOME TAXES (2,800,967) (857,079)

PROVISION FOR INCOME TAXES 1,600 1,600
----------------- -----------------

NET LOSS $ (2,802,567) $ (858,679)
================= =================

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

F-24

PACIFIC ETHANOL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 30, 2003 (INCEPTION) TO DECEMBER 31, 2003
AND THE YEAR ENDED DECEMBER 31, 2004

Series A Redeemable
Convertible Preferred Stock Common Stock Additional
--------------------------- ------------------------ Paid-In Due from Accumulated
Shares Amount Shares Amount Capital Stockholders Deficit Total
----------- ----------- ---------- ----------- ----------- ----------- ----------- -----------
BALANCE,
January 30, 2003
(inception) -- $ -- -- $ -- $ -- $ -- $ -- $ --
Issuance of common
stock to the
founders -- -- 10,000,000 1,000 -- (1,000) -- --
Issuance of common
stock for note
payable -- -- 1,000,000 1,202,682 -- -- -- 1,202,682
Issuance of common
stock to friends
and family, net
of offering
costs of $75,975 -- -- 733,200 1,023,825 -- -- -- 1,023,825
Net loss -- -- -- -- -- -- (858,679) (858,679)
----------- ----------- ---------- ----------- ----------- ----------- ----------- -----------
BALANCE,
December 31,
2003 -- -- 11,733,200 2,227,507 -- (1,000) (858,679) 1,367,828
Issuance of common
stock to friends
and family, net
of offering
costs of $7,127 -- -- 19,000 21,373 -- -- -- 21,373
Issuance of
warrants to
purchase 920,000
shares of common
stock for
noncash
compensation
to non-employee
for services -- -- -- -- 1,380,000 -- -- 1,380,000
Exercise of
warrants -- -- 920,000 92 -- -- -- 92
Collection of
shareholder
receivable -- -- -- -- -- 400 -- 400
Issuance of common
stock
in working
capital
round, net of
offering
costs of $107,418 -- -- 500,000 892,582 -- (67,500) -- 825,082
Issuance of common
stock in
working capital
round, net of
offering
costs of $2,475 -- -- 103,666 308,524 -- -- -- 308,524
Conversion of LDI
debt -- -- 170,000 255,000 -- -- -- 255,000
Net loss -- -- -- -- -- -- (2,802,567) (2,802,567)
----------- ----------- ---------- ----------- ----------- ----------- ----------- -----------
Balance, December
31, 2004 -- $ -- 13,445,866 $ 3,705,078 $ 1,380,000 $ (68,100) $(3,661,246) $ 1,355,732
=========== =========== ========== =========== =========== =========== =========== ===========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

F-25

PACIFIC ETHANOL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

From January 30,
For Year Ended 2003 (inception) to
December 31, December 31,
2004 2003
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,802,567) $ (858,679)
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation 78,743 46,684
Amortization of debt issuance costs 20,000 11,667
Interest expense relating to amortization of debt discount
on related party note payable 240,536 129,824
Non cash compensation for consulting services 1,207,500 --
Changes in operating assets and liabilities:
Accounts receivable 15,724 (24,188)
Other receivable 256,564 (305,370)
Inventories 1,734 (1,734)
Prepaid expenses (98,938) (21,677)
Accounts payable 87,055 295,957
Accounts payable (related party) 396,190 450,021
Interest payable (121,316) 152,180
Payroll taxes payable 5,604 13,359
Accrued liabilities 278,656 253,147
--------------- ---------------

Net cash provided by (used in) operating activities (434,515) 141,191
--------------- ---------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (739,354) (610,897)
Issuance of related party notes receivable -- (205,035)
Payments received on related party notes receivable 199,749 --
Costs associated with business acquisition (430,393) --
--------------- ---------------

Net cash used in investing activities (969,998) (815,932)
--------------- ---------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock, net 1,155,379 1,023,825
Proceeds from exercise of warrants 92 --
Payments of debt issuance costs -- (100,000)
--------------- ---------------

Net cash provided by financing activities 1,155,471 923,825
--------------- ---------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (249,042) 249,084

CASH AND CASH EQUIVALENTS, beginning of period 249,084 --
--------------- ---------------

CASH AND CASH EQUIVALENTS, end of period $ 42 $ 249,084
=============== ===============

SUPPLEMENTAL INFORMATION:
Interest paid $ 422,233 $ 487
=============== ===============
Income taxes paid $ 2,400 $ 1,600
=============== ===============

NON-CASH FINANCING AND INVESTING ACTIVITIES:
Purchase of grain facility with note payable $ -- $ 5,100,000
=============== ===============
Issuance of stock for receivable $ 67,100 $ 1,000
=============== ===============
Conversion of debt to equity $ 255,000 $ --
=============== ===============

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

F-26

PACIFIC ETHANOL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND NATURE OF OPERATIONS:
--------------------------------------

Pacific Ethanol, Inc. (the "Company") was incorporated in California on
January 30, 2003 to construct an ethanol production facility and
manufacture and distribute ethanol fuel in California.

On June 11, 2003, the Company and an individual formed Pacific Ag
Products, LLC ("Pacific Ag Products"), which was organized in the State
of California as a limited liability company to market and sell wet
distillers grain, a by-product of ethanol production, to dairies. The
Company has a 90% interest in Pacific Ag Products.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------

LIQUIDITY AND FINANCIAL CONDITION - The accompanying financial
statements have been prepared in conformity with accounting principles
generally accepted in the United States, which contemplate continuation
of the Company as a going concern.

On March 23, 2005, the Company completed a private offering of equity
securities which raised $21,000,000 through the sale of 7,000,000
shares of the Company's common stock at $3.00 per share. In addition,
in connection with the sale of these shares, warrants to purchase
1,400,000 shares of common stock at an exercise price of $3.00 per
share, and warrants to purchase 700,000 shares of common stock at an
exercise price of $5.00 per share, were issued. This transaction was
completed just prior to the completion of a Share Exchange Transaction,
described below. (See Note 11)

On March 23, 2005, the shareholders of the Company completed a Share
Exchange Transaction with Accessity Corp., a New York corporation
("Accessity"), and the holders of the membership interests of each of
Kinergy Marketing, LLC, an Oregon limited liability company
("Kinergy"), and ReEnergy, LLC, a California limited liability company
("ReEnergy"), pursuant to which Accessity acquired all of the issued
and outstanding shares of common stock of the Company and all of the
outstanding membership interests of each of Kinergy and ReEnergy (the
"Share Exchange Transaction"). This transaction has been accounted for
as a reverse acquisition whereby the Company is the accounting
acquiror. Immediately prior to the closing of the Share Exchange
Transaction, Accessity reincorporated in the State of Delaware under
the name Pacific Ethanol, Inc. through a merger of Accessity with and
into its then-wholly-owned Delaware subsidiary named Pacific Ethanol,
Inc. ("Pacific Ethanol Delaware"), which was formed for the purpose of
effecting the reincorporation. Pacific Ethanol Delaware is the
surviving entity resulting from the reincorporation merger and the
Share Exchange Transaction and has three principal wholly-owned
subsidiaries: Kinergy, the Company and ReEnergy. (See Note 11).

The Company is in the business of marketing ethanol and intends, during
the next 12 months, to commence construction of an ethanol production
facility. Based on its current cash position and anticipated use of
cash in operations and planned ethanol plant construction, management
believes that the Company has sufficient funds to operate over the next
12 months.

F-27

PACIFIC ETHANOL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the company and its subsidiary. All significant
intercompany accounts and transactions have been eliminated in
consolidation.

CASH AND CASH EQUIVALENTS - For financial statement purposes, the
Company considers all highly liquid investments with an original
maturity of three months or less, to be cash equivalents.

ALLOWANCE FOR DOUBTFUL ACCOUNTS - The Company maintains an allowance
for doubtful accounts for estimated losses resulting from the inability
of its customers to make required payments. The allowance is determined
through an analysis of the aging of accounts receivable and assessments
of risk that are based on historical trends and an evaluation of the
impact of current and projected economic conditions. The Company
evaluates the past-due status of its accounts receivable based on
contractual terms of sale. If the financial condition of the Company's
customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required. At
December 31, 2003 and 2004, management of the Company believes that all
receivables are collectible, and therefore has not established an
allowance for bad debt. The Company has had no bad debt expense for the
period from January 30, 2003 (inception) to December 31, 2004.

INVENTORIES - In connection with the acquisition of the grain facility
in June 2003 (See Note 4), the Company acquired inventory, primarily
representing whole corn for a total of $770,298. During 2003, the
majority of the inventory acquired was sold and at December 31, 2004
the balance was $0. Inventories are stated at the lower of cost
(first-in, first-out) or market. The Company provides inventory
reserves for estimated obsolescence or unmarketable inventory equal to
the difference between the cost of inventory and the estimated
realizable value based upon assumptions about future demand and market
conditions.

PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are
stated at cost. Depreciation is computed using the straight-line method
over the following estimated useful lives:

Facilities 10 - 25 years
Equipment and vehicles 7 years
Office furniture, fixtures and equipment 5 - 10 years

The cost of normal maintenance and repairs is charged to operations as
incurred. Material expenditures that increase the life of an asset are
capitalized and depreciated over the estimated remaining useful life of
the asset. The cost of fixed assets sold, or otherwise disposed of, and
the related accumulated depreciation or amortization are removed from
the accounts, and any resulting gains or losses are reflected in
current operations.

IMPAIRMENT OF LONG-LIVED ASSETS - In the event that facts and
circumstances indicate that the cost of long-lived assets used in
operations might be impaired, an evaluation of recoverability would be
performed. If an evaluation were required, the estimated undiscounted
cash flows estimated to be generated by those assets would be compared
to their carrying amounts to determine if a write-down to market value
or discounted cash flows is required.

F-28

PACIFIC ETHANOL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

REVENUE RECOGNITION - During 2003, the Company sold corn from inventory
acquired in the purchase of a grain facility (see "inventories" above),
and during 2003 and for the year ended December 31, 2004, received a
handling fee from its trans-loading capabilities. Revenue from the sale
of grains was recognized upon shipment to customers. Revenue from
trans-loading services was recognized when unloading the rail cars,
thus at the time that the service was completed.

STOCK-BASED COMPENSATION - SFAS 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION ("SFAS 123") encourages, but does not require, companies
to record compensation cost for stock-based employee compensation plans
at fair value. The Company may elect to continue to account for
stock-based compensation using the intrinsic value method prescribed in
APB 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and related
Interpretations. Under APB 25 and the intrinsic value method, the
exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant or, in the
case of the Company's employee stock purchase plans since the plans are
non-compensatory, no compensation expense is recognized. In December
2002, the Financial Accounting Standards Board ("FASB") issued SFAS
148, ACCOUNTING FOR STOCK-BASED COMPENSATION--TRANSITION AND DISCLOSURE
("SFAS148"). FAS 148 amends the disclosure requirements of FAS 123 to
require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.

INCOME TAXES - Income taxes are accounted for under Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income
Taxes. Under SFAS No. 109, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax
basis of assets and liabilities, and are measured using enacted tax
rates and laws that are expected to be in effect when the differences
reverse. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized.

USE OF ESTIMATES - The preparation of the Company's consolidated
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS - The estimated fair values for
financial instruments are determined at discrete points in time based
on relevant market information. These estimates involve uncertainties
and cannot be determined with precision.

The following methods and assumptions were used in estimating the
indicated fair values of the Company's financial instruments:
o Cash and cash equivalents, accounts receivable, notes
receivable, accounts payable and other short term
liabilities: The carrying amounts approximate fair
value because of the short maturity of those
instruments.
o Debt: The fair value of the Company's debt is
estimated based on current rates offered to the
Company for similar debt and approximates carrying
value.

F-29

PACIFIC ETHANOL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

CONCENTRATIONS OF CREDIT RISK - Credit risk represents the accounting
loss that would be recognized at the reporting date if counterparties
failed completely to perform as contracted. Concentrations of credit
risk (whether on or off balance sheet) that arise from financial
instruments exist for groups of customers or counterparties when they
have similar economic characteristics that would cause their ability to
meet contractual obligations to be similarly affected by changes in
economic or other conditions described below.

Financial instruments that subject the Company to credit risk consist
of cash balances maintained in excess of federal depository insurance
limits and accounts receivable, which have no collateral or security.
The accounts maintained by the Company at the financial institution are
insured by the Federal Deposit Insurance Corporation (FDIC) up to
$100,000. At December 31, 2003, the uninsured balance was $65,446 and
at December 31, 2004, the uninsured balance was $0. The Company has not
experienced any losses in such accounts and believes it is not exposed
to any significant risk of loss on cash.

During 2003, the Company sold corn from inventory acquired in the
purchase of a grain facility, and in 2004 and 2003, received a handling
fee from its trans-loading capabilities. During the year ended December
31, 2004 and period from January 30, 2003 (inception) to December 31,
2003, the Company had sales from customers representing 10% or more of
sales as follows:

2004 2003
----------------- -----------------
Customer A 36% 49%
Customer B 25% 0%
Customer C 22% 0%
Customer D 15% 0%
Customer E 0% 36%
Customer F 0% 11%

As of December 31, 2004 and 2003, the Company had receivables of
approximately $8,464 and $22,479 from these customers, representing 93%
and 100%, respectively, of total accounts receivable. The Company does
not require collateral of its customers and as of December 31, 2004 and
2003, has not incurred significant credit losses.

RECLASSIFICATIONS - Certain prior year amounts have been reclassified
to conform to the current presentation. Such reclassification had no
effect on net loss.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In December 2004, the FASB
issued SFAS 123R, SHARE-BASED PAYMENT ("SFAS 123R") which is a revision
of SFAS 123 and supersedes APB 25. Among other items, SFAS 123R
eliminates the use of APB 25 and the intrinsic value method of
accounting, and requires companies to recognize the cost of employee
services received in exchange for awards of equity instruments, based
on the grant date fair value of those awards, in the financial
statements. The effective date of SFAS 123R is the first reporting
period beginning after December 15, 2005. SFAS 123R permits companies

F-30

PACIFIC ETHANOL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

to adopt its requirements using either a "modified prospective" method,
or a "modified retrospective" method. Under the "modified prospective"
method, compensation cost is recognized in the financial statements
beginning with the effective date, based on the requirements of SFAS
123R for all share-based payments granted after that date, and based on
the requirements of SFAS 123 for all unvested awards granted prior to
the effective date of SFAS 123R. Under the "modified retrospective"
method, the requirements are the same as under the "modified
prospective" method, but it also permits entities to restate financial
statements of previous periods based on pro forma disclosures made in
accordance with SFAS 123.

While SFAS 123R permits entities to continue to use a standard option
pricing model (e.g., Black-Scholes) to measure the fair value of stock
options granted to employees, the standard also permits the use of a
"lattice" model. The Company has not yet determined which model it will
use to measure the fair value of employee stock options upon the
adoption of SFAS 123R.

The Company currently has only one stock option outstanding which
vested in the first quarter of 2005, and expects to adopt SFAS 123R
effective January 1, 2006. However, because the Company has not yet
determined which of the adoption methods it will use, the Company has
not yet determined the impact of adopting SFAS 123R. (See Note 8)

3. RELATED PARTY NOTES RECEIVABLE:
-------------------------------

On November 5, 2003, the Company issued a short-term note in the amount
of $200,000 to Kinergy, which at the time was owned by an officer and
director of the Company. The short-term note was due and payable
January 4, 2004, with interest at a rate of 5% per annum. As of
December 31, 2003, interest income relating to this note was not
significant. Payment of the principal and all accrued interest was
received in January 2004.

On November 10, 2003, the Company issued a short-term note in the
amount of $5,000 to Doug and Jane Dickson, husband and wife, who hold a
minority interest in the Pacific Ag Products. The short-term note is
due and payable November 9, 2005, with interest at a rate of 5% per
annum. As of December 31, 2004 and 2003, interest income relating to
this note was not significant.

4. PROPERTY AND EQUIPMENT:
-----------------------

In June 2003, the Company acquired a grain facility in Madera,
California for approximately $5,100,000 from bankruptcy proceedings of
Coast Grain Company. The Company intends to construct an ethanol plant
at the grain facility. In July 2003, the Company entered into a
design-build contract with W.M. Lyles Co., a subsidiary of Lyles
Diversified, Inc. ("LDI") (See Note 5), for the design and construction
of the ethanol plant, which will be billed at its standard time and
material rates. W.M. Lyles Co. will discount its normal construction
management fee by 5% from its standard rates. The Company's cost for
the construction of the facility has been estimated to be approximately
$52,000,000. In addition, should the Company build a second ethanol
plant W.M. Lyles Co. will be engaged for the design and construction of
the facility.

The Company is currently in process of renegotiating a revised bid with
W.M. Lyles Co. that expired on April 1, 2005.

F-31

PACIFIC ETHANOL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

As of December 31, 2004 and 2003, the Company had incurred costs of
$1,306,926 and $578,159 under the design-build contract planning phase,
which has been included in construction in progress at December 31,
2004 and 2003, respectively. Included in this amount is a total of
$453,325 and $229,078 related to the construction management fee of
W.M. Lyles Co., of which $236,259 and $217,066 had not been paid at
December 31, 2004 and 2003, respectively. Included in construction in
progress at December 31, 2004 is capitalized interest of $45,995.

Property and equipment consist of the following:

December 31,
---------------------------
2004 2003
----------- -----------
Land $ 515,298 $ 515,298
Facilities 4,234,703 4,234,703
Equipment and vehicles 350,000 350,000
Office furniture, fixtures and equipment 43,324 32,737
----------- -----------
5,143,325 5,132,738
Accumulated depreciation (125,427) (46,684)
----------- -----------
5,017,898 5,086,054
Construction in progress 1,306,926 578,159
----------- -----------
$ 6,324,824 $ 5,664,213
=========== ===========

As of December 31, 2004 and 2003, property and equipment totaling
$3,897,328 had not been placed in service. Depreciation expense was
$78,743 for the year ended December 31, 2004 and $46,684 from January
30, 2003 (inception) to December 31, 2003.

5. RELATED PARTY NOTE PAYABLE:
---------------------------

In connection with the acquisition of the grain facility in March 2003,
the Company issued a convertible promissory note in the amount of
$5,100,000 to LDI. The loan bears interest at a fixed rate of 5%
through June 19, 2004, at which time it converted to a variable rate
based on the Wall Street Journal Prime Rate (5.25% as of December 31,
2004) plus 2%. The first payment, consisting of interest only, was due
June 19, 2004, after which interest is due and payable monthly.
Principal payments are due annually in three equal installments
beginning June 20, 2006 and ending June 20, 2008. Should the
construction costs of the ethanol production facility be less than
$42,600,000, the Company must prepay principal owing under the loan
equal to the difference between the actual construction cost and
$42,600,000.

In addition, should the Company obtain construction funding for a
second ethanol plant, all principal and accrued interest outstanding at
the time becomes due. The note is collateralized by a first deed of
trust on the grain facility and a personal guaranty for up to a maximum
amount of $1,000,000 by an individual shareholder. LDI has the option
to convert up to $1,500,000 of the debt into the Company's common stock
at a purchase price of $1.50 per share until June 1, 2005. On July 31,
2004, September 24, 2004 and November 15, 2004, LDI converted $150,000,
$90,000 and $15,000 of debt into 100,000, 60,000 and 10,000 shares of
common stock, respectively, at a conversion price equal to $1.50 per
share. (See Note 7) As part of the terms of the note, W.M. Lyles Co., a
subsidiary of LDI, shall supply construction services to the Company
for the construction of the ethanol plant. (See Note 4)

F-32

PACIFIC ETHANOL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In partial consideration for the above loan, the Company issued
1,000,000 shares of the Company's conversion stock to LDI. The fair
value of the common stock on the date of issuance, $1,202,682, was
recorded as a debt discount and is being amortized over the life of the
loan and recorded as interest expense. As of December 31, 2004 and
2003, the unamortized debt discount was $832,322 and $1,072,858,
respectively. The Company also incurred fees to obtain the loan in the
amount of $100,000, which is also being expensed over the life of the
loan. These fees were paid to Cagan McAfee Capital Partners, LLC
("CMCP"), a founding shareholder of the Company.

The aggregate maturities of the note at December 31, 2004 are as
follows:

Year ending December 31,
2005 $ --
2006 1,615,000
2007 1,615,000
2008 1,615,000
------------
4,845,000
Less: Unamortized original issuance discount (832,322)
------------
$ 4,012,678
============

6. REDEEMABLE CONVERTIBLE PREFERRED STOCK:
---------------------------------------

The Company has a total of 30,000,000 shares of no par value preferred
stock authorized, 7,000,000 shares of which have been designated Series
A 8% Cumulative Convertible Redeemable Preferred Stock (the "Series A
Preferred Stock"). Holders of Series A Preferred Stock will (i) have
priority rights to dividends from funds legally available therefore at
the rate of 8% per annum payable in cash or stock, accrued from the
closing of the offer and sale of the Series A Preferred Stock, per
share, cumulative, payable pro rata; and (ii) be entitled to preference
in all of the assets of the Company available for distribution to
holders of preferred stock upon liquidation, dissolution, or winding up
of the affairs of the Company. In certain circumstances the Company has
the right, at any time after December 31, 2005, to force conversion of
the Series A Preferred Stock into fully-paid and non-assessable shares
of common stock at the ratio of one share of common stock for every one
share of Series A Preferred Stock (shares of common stock are reserved
for any such conversion).

No dividends accrue on the shares of Series A Preferred Stock until
after the closing of the offering and sale of the Series A Preferred
Stock. Thereafter, dividends accrue, whether or not earned or declared,
and become payable commencing January 15, 2005 and on each January 15th
thereafter; provided that such dividends shall only be paid upon a
determination by the Board of Directors of the Company that funds are
legally available therefore and that payment is in the best interests
of the Company. The shares of Series A Preferred Stock are
non-participating with regard to dividends, if any, which may be
declared and paid to the holders of any other classes of the Company's
stock.

F-33

PACIFIC ETHANOL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

No shares of Series A Preferred Stock have been issued, but any shares
of Series A Preferred Stock issued may at the sole election of the
Company be redeemed at any time, and from time to time, during the four
(4) years following the issuance thereof, for a price per share of
$6.50 plus (i) all accrued but unpaid dividends on such shares and (ii)
10% per share per annum. Any redemption shall be applied ratably among
all shares of Series A Preferred Stock outstanding at the time of
redemption.

In the event of any liquidation, dissolution, or winding up of the
Company, whether voluntary or involuntary, holders of the Series A
Preferred Stock shall be entitled to receive a distribution of $6.50
per share plus all declared but unpaid dividends on each share out of
assets of the Company, prior to any distribution of assets with respect
to any shares of common stock of the Company as a result of such
liquidation, distribution, or winding up of the Company. If, in the
case of any such liquidation, dissolution, or winding up of the
Company, the assets of the Company or proceeds thereof shall be
insufficient to make the full liquidation payment of $6.50 per share,
then such assets and proceeds shall be distributed ratably among the
holders of the Series A Preferred Stock. A consolidation or merger of
the Company with or into one or more corporations, or a sale of all or
substantially all of the assets of the Company in consideration for the
issuance of equity securities of another corporation shall be deemed to
be a liquidation, dissolution, or winding up of the Company.

7. COMMON STOCK:
-------------

In February 2003, the Company sold 10,000,000 shares of common stock to
the founders of the Company at $0.0001.

In March 2003, the Company issued 1,000,000 common shares of the
Company's stock to LDI. (See Note 5)

From August through December 2003, the Company sold 733,200 shares of
common stock in a private offering at $1.50 per share for net proceeds
of $1,023,825. In connection with the sale of these shares, the Company
paid offering costs of $75,975, including a finder's fee of $21,250 to
CMCP. In addition, the Company issued warrants to purchase 41,587
shares of common stock at an exercise price of $1.50 per share and an
expiration date five years from the date of issuance. Of the total
warrants issued, warrants to purchase 14,167 shares of common stock
were issued to CMCP.

From January 2004 through February 2004, the Company sold 19,000 shares
of common stock in a private offering at $1.50 per share for net
proceeds of $21,373. In connection with the sale of these shares, the
Company paid offering costs of $7,127, including a finder's fee of
$2,850 to Prima Capital Group, Inc. As payment of commissions earned in
connection with the sale of these shares, the Company issued warrants
to purchase 1,900 shares of common stock at an exercise price of $1.50
per share and an expiration date five years from the date of issuance.

F-34

PACIFIC ETHANOL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

From April 2004 through June 2004, the Company sold 500,000 shares of
common stock in a private offering at $2.00 per share for net proceeds
of $892,582 as of September 30, 2004. (Of this amount $67,500 is
included in due from stockholders in the equity section). In connection
with the sale of these shares, the Company paid offering costs of
$107,418 including a finder's fee of $100,000 to CMCP. In addition, the
Company issued warrants to CMCP to purchase 50,000 shares of common
stock at an exercise price of $2.00 per share and an expiration date
five years from the date of issuance.

On July 31, 2004, September 24, 2004 and November 15, 2004, LDI
converted $150,000, $90,000 and $15,000 of debt into 100,000, 60,000
and 10,000 shares of common stock, respectively, at a conversion price
of $1.50 per share.
(See Note 5)

On September 29, 2004, a consulting company exercised warrants to
purchase 920,000 shares of the Company's stock at an aggregate exercise
price of $92. (See Note 8)

From October 2004 through December 2004, the Company sold 103,666
shares of common stock in a private offering at $3.00 per share for net
proceeds of $308,524 as of December 31, 2004. In connection with the
sale of these shares, the Company paid offering costs of $2,475.

STOCK OPTIONS - In February 2004, the Board of Directors of the Company
ratified the grant of options on December 10, 2003 to a member of
management to acquire 25,000 shares of the Company's common stock at an
exercise price of $0.01 per share. The options vested upon the closing
of the Share Exchange Transaction. (See Note 11)

8. COMMITMENTS AND CONTINGENCIES:
------------------------------

OPERATING LEASES - The Company leases shared office space in Fresno,
California on a month-to-month basis at $2,934 per month. Rent expense
was $24,983 and $5,600 for the year ended December 31, 2004 and for the
period from January 30, 2003 (inception) to December 31, 2003,
respectively.

SETTLEMENT OF CORN CONTRACTS - In July and August 2003, the Company,
through its subsidiary entered into contracts to sell corn to two
customers at fixed rates. At the same time, the Company entered into
contracts to purchase corn from a vendor at fixed rates. These purchase
and sale contracts contained shipping periods ranging from October 2003
to September 2004. In the fourth quarter of 2003, the Company cancelled
the contracts and settled them based on the net settlement provisions
standard in the grain industry. At December 31, 2003, the Company
recorded a receivable related to the settlement of the corn contracts
in the amount of $274,259, which is reflected in other receivables in
the consolidated balance sheet. There were no receivables at December
31, 2004. In addition, the Company has recorded a payable related to
the settlement of the corn contract in the amount of $16,509 and
$204,811 as of December 31, 2004 and 2003, respectively, which is
reflected in accrued liabilities in the consolidated balance sheets.

F-35

PACIFIC ETHANOL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A party to one of the sales agreements did not perform according to the
net settlement provisions standard in the grain industry and thus
continued to engage in contracts without the consent or approval of the
Company. The Company has attempted to settle with the entity with no
success.

On September 22, 2004, R.A. Davis Commodities, LLC filed a complaint
for breach of contract, promissory estoppel and negligence in the
Superior Court of the State of California for the County of Fresno
against the Company. The complaint seeks actual and consequential
damages in the amount of approximately $700,000 based on the Company's
alleged breach of certain rolled corn purchase contracts. The Company
responded to the complaint on January 27, 2005. The Company also filed
a cross-complaint against R.A. Davis on that date, alleging breach of
oral and written contract in connection with sales of feed product as
well as "transloading" services performed for R.A. Davis. The
cross-complaint seeks damages in the amount of $121,435. The trial in
this matter is set for March 13, 2006. The Company believes that the
claims made in the complaint are without merit and the Company expects
to vigorously defend this lawsuit.

On November 8, 2004, Insurance Corporation of Hanover and Kruse
Investments dba Western Milling, LLC (collectively, the "Plaintiffs")
filed a Complaint for Damages in the Superior Court of the State of
California for the County of Madera against the Company. The Complaint
seeks actual and consequential damages in the amount of at least
$960,800 based on the Company's alleged breach of contract and
negligence in connection with losses suffered by Plaintiffs arising out
of damage caused to Western Milling's canola meal that was stored at
the Company's grain silos located at the Company's Madera County
facility, which facility was the subject of a grain silo fire on
January 12, 2004. The Company's insurance company has settled this
matter. Plaintiff's have dismissed the action against the Company with
prejudice and have provided the Company a written release.

ADVISORY FEE - The Company entered into an agreement with CMCP dated
April 14, 2004, in connection with raising funding for an ethanol
production facility. The agreement provides that upon raising a minimum
of $15,000,000 the Company would pay CMCP a fee, through that date,
equal to $10,000 per month starting from April 15, 2003. In addition,
the agreement provided for payment of $25,000 per month for a minimum
of 12 months upon the completion of a merger between the Company and a
public company, running from the date of close of such merger, as well
as an advisory fee of 3% of any equity amount raised through the
efforts of CMCP, including cash amounts received through a merger with
another corporate entity. (See Note 11)

In a separate agreement, certain founders of the Company agreed to sell
an aggregate of 500,000 shares of the Company's common stock owned by
such founders to CMCP, at $0.01 per share, if certain funding were
secured by March 31, 2005. (See Note 11)

CASUALTY LOSS - In January 2004, canola stored in one of the silos at
the Company's Madera County, California facility caught on fire. The
facility was fully insured with $10 million of property and general
liability insurance. The canola was owned by a third party who was also
insured. The Company's insurance provider advanced the Company
$1,000,000 towards fire damage repair costs. As of December 31, 2004,
the Company has incurred costs of $580,374. The difference of $419,626
is included in other accrued liabilities. The Company is anticipating
$3,000,000 in additional estimated insurance proceeds to complete the
reconstruction of the facility based on a detailed engineering estimate
for full restoration received by the Company. The Company is proceeding
with the restoration.

F-36

PACIFIC ETHANOL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NON-CASH COMPENSATION - On February 12, 2004, the Company entered into
a consulting agreement with an unrelated party to represent the Company
in investors' communications and public relations with existing
shareholders, brokers, dealers and other investment professionals as to
the Company's current and proposed activities. As compensation for such
services, the Company issued warrants to the consultant to purchase
920,000 shares of the Company's common stock. These warrants vested
upon the effective date of the agreement. Based on the fair value of
these warrants on the date of issuance, prepaid consulting fees were
recorded in the amount of $1,380,000, which are being amortized over
one year. As of December 31, 2004, the Company recorded non-cash
expense of $1,207,500 relating to these warrants. On September 29,
2004, the consulting company exercised warrants to purchase 920,000
shares of the Company's common stock at an aggregate exercise price
equal to $92.

Contingent upon completing a merger, acquisition or share exchange with
a public company by March 31, 2005, the Company will issue warrants to
purchase up to 230,000 additional shares of common stock that will vest
over a period of two years. (See Note 11)

9. INCOME TAXES:
-------------

For the years ended December 31, 2004 and 2003, the provision for
income taxes differs from that computed by applying federal statutory
rates to loss before income taxes, as follows:

2004 2003
----------- -----------
Benefit computed at the statutory rate $(1,265,535) $ (299,978)
Reduction resulting from:
Valuation allowance 1,266,095 300,538
State taxes, net of federal benefit 1,040 1,040
----------- -----------

Income tax expense $ 1,600 $ 1,600
=========== ===========

Deferred income taxes reflect the net tax effects of temporary
differences between carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Components of the Company's deferred tax assets (liabilities)
at December 31, 2004 and 2003 are as follows:

2004 2003
----------- -----------

Long-term deferred tax assets (liabilities)
Net operating loss carryforward $ 1,488,430 $ 356,569
Depreciation (29,010) (10,519)
----------- -----------

Net deferred non-current deferred liabilities 1,459,420 346,050
Valuation allowance (1,459,420) (346,050)
----------- -----------
Net deferred current tax assets (liabilities) $ -- $ --
=========== ===========

F-37

PACIFIC ETHANOL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

As of December 31, 2004, the Company had federal and California net
operating loss carry forwards of approximately $3,807,483 and
$2,193,278, respectively, available to reduce future taxable income,
which expire beginning in the years 2024 for federal and in 2014 for
state purposes. Under Section 382 of the Internal Revenue Code, the
utilization of the net operating loss carry forwards can be limited
based on changes in the percentage of ownership of the Company.

10. RELATED PARTY TRANSACTIONS:
---------------------------

The Company entered into a consulting contract with a shareholder of
the Company for consulting services related to the development of the
ethanol plant at $6,000 per month. The Company paid a total of $72,000
and $54,000 for the year ended December 31, 2004 and for the period
from January 30, 2003 (inception) to December 31, 2003, respectively.

In 2003, the Company sold various cattle feed products totaling
$109,698 to a business owned by a shareholder. Of this amount, $76,903
was sold to the shareholder's business during the period January 30,
2003 (inception) to December 31, 2003. There were no such sales made
during the year ended December 31, 2004.

The Company reimbursed a stockholder for expenses paid on behalf of the
Company. The total amount reimbursed from January 30, 2003 (inception)
to December 31, 2003 was $200,000. There were no such expenses
reimbursed during the year ended December 31, 2004.

On August 28, 2003, the Company entered into an agreement with
ReEnergy, LLC for an option to buy 89.3 acres in Visalia, California at
a price of $12,000 per acre for the purpose of building an ethanol
production facility.

The Company entered into a consulting agreement for $3,000 per month
with a company owned by a member of ReEnergy for consulting services
related to environmental regulations and permitting. The Company paid a
total of $40,542 for the year ended December 31, 2004.

On October 27, 2003, certain founders of the Company entered into an
agreement with an unrelated third party to sell 1,500,000 shares of the
Company's common stock owned by such founders at $1.50 per share for
total proceeds of $2,250,000. In addition, under the terms of the
agreement, the founders involved in the transaction agreed to vote a
certain number of their existing shares in favor of the third party
principal's election to the Board of Directors of the Company.

On December 28, 2004, William Jones, a related party, advanced the
Company $20,000 at 5% interest, due and payable upon close of the Share
Exchange Transaction. (See Note 11)

11. SUBSEQUENT EVENTS (UNAUDITED):
------------------------------

LOANS TO THE COMPANY - On January 10, 2005 and February 22, 2005,
William Jones, a related party, advanced the Company $60,000 and
$20,000, respectively, at 5% interest, due and payable upon close of

F-38

PACIFIC ETHANOL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

the Share Exchange Transaction. The accumulated principal due was
repaid on March 24, 2005 and the related accrued interest was paid on
April 15, 2005. (See Note 9)

On January 10, 2005, Neil Koehler, a related party, advanced the
Company $100,000 at 5% interest, due and payable upon close of the
Share Exchange Transaction. The principal was repaid on March 24, 2005
and the related accrued interest was paid on April 15, 2005.

On January 31, 2005, Eric McAfee, a principal of CMCP, advanced the
Company $100,000 at 5% interest, due and payable upon close of the
Share Exchange Transaction. The principal was repaid on March 24, 2005
and the related accrued interest was paid on April 15, 2005.

On January 14, 2005, February 4, 2005 and March 10, 2005, LDI converted
$36,000, $114,000, and $97,682 of debt into 24,000, 76,000 and 65,121
shares of the Company's common stock, respectively, at a conversion
price equal to $1.50 per share. (See Notes 5 and 6)

PRIVATE OFFERING - On March 23, 2005, the Company issued to 63
accredited investors in a private offering an aggregate of 7,000,000
shares of common stock at a purchase price of $3.00 per share, two-year
investor warrants to purchase 1,400,000 shares of common stock at an
exercise price of $3.00 per share and two-year investor warrants to
purchase 700,000 shares of common stock at an exercise price of $5.00
per share, for total gross proceeds of approximately $21,000,000. The
Company paid cash placement agent fees and expenses of approximately
$1,850,400 and issued five-year placement agent warrants to purchase
678,000 shares of common stock at an exercise price of $3.00 per share
in connection with the offering. Additional costs related to the
financing include legal, accounting and consulting fees that totaled
approximately $255,048 through March 31, 2005 and continue to be
incurred in connection with various securities filings and the resale
registration statement described below.

The Company is obligated under a Registration Rights Agreement to file,
on the 151st day following March 23, 2005, a Registration Statement
with the Securities and Exchange Commission registering for resale
shares of common stock, and shares of common stock underlying investor
warrants and certain of the placement agent warrants, issued in
connection with the private offering. If the Company (i) does not file
the Registration Statement within the time period prescribed, or (ii)
fails to file with the Securities and Exchange Commission a request for
acceleration in accordance with Rule 461 promulgated under the
Securities Act of 1933, within five trading days of the date that the
Company is notified (orally or in writing, whichever is earlier) by the
Securities and Exchange Commission that the Registration Statement will
not be "reviewed," or is not subject to further review, or (iii) the
Registration Statement filed or required to be filed under the
Registration Rights Agreement is not declared effective by the
Securities and Exchange Commission on or before 225 days following
March 23, 2005, or (iv) after the Registration Statement is first
declared effective by the Securities and Exchange Commission, it ceases
for any reason to remain continuously effective as to all securities
registered thereunder, or the holders of such securities are not
permitted to utilize the prospectus contained in the Registration
Statement to resell such securities, for more than an aggregate of 45
trading days during any 12-month period (which need not be consecutive
trading days) (any such failure or breach being referred to as an
"Event," and for purposes of clause (i) or (iii) the date on which such
Event occurs, or for purposes of clause (ii) the date on which such

F-39

PACIFIC ETHANOL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

five-trading day period is exceeded, or for purposes of clause (iv) the
date on which such 45-trading day-period is exceeded being referred to
as "Event Date"), then in addition to any other rights the holders of
such securities may have under the Registration Statement or under
applicable law, then, on each such Event Date and on each monthly
anniversary of each such Event Date (if the applicable Event shall not
have been cured by such date) until the applicable Event is cured, the
Company is required to pay to each such holder an amount in cash, as
partial liquidated damages and not as a penalty, equal to 2.0% of the
aggregate purchase price paid by such holder pursuant to the Securities
Purchase Agreement relating to such securities then held by such
holder. If the Company fails to pay any partial liquidated damages in
full within seven days after the date payable, the Company is required
to pay interest thereon at a rate of 18% per annum (or such lesser
maximum amount that is permitted to be paid by applicable law) to such
holder, accruing daily from the date such partial liquidated damages
are due until such amounts, plus all such interest thereon, are paid in
full. The partial liquidated damages are to apply on a daily pro-rata
basis for any portion of a month prior to the cure of an Event.

The Registration Rights Agreement also provides for customary
piggy-back registration rights whereby holders of shares of the
Company's common stock, or warrants to purchase shares of common stock,
can cause the Company to register such shares for resale in connection
with the Company's filing of a Registration Statement with the
Securities and Exchange Commission to register shares in another
offering. The Registration Rights Agreement also contains customary
representations and warranties, covenants and limitations. (See Note 1)

ADVISORY FEE. - The Company paid an advisory fee to CMCP in the amount
of $235,000 on March 24, 2005, pursuant to the terms of the agreement
between CMCP (See Note 8) and the Company and in connection with the
private offering described above. In addition, $83,000 was payable in
connection with cash received from Accessity in connection with the
Share Exchange Transaction. Pursuant to the terms of the consulting
agreement, CMCP will continue to receive payments of $25,000 per month
until at least March 2006.

On January 5, 2005, the Company entered into an agreement with
Northeast Securities, Inc. ("NESC") and Chadbourn Securities, Inc.
("Chadbourn"), a related party, in connection with the private
placement described above. The agreement provides that upon completion
of a financing within the time-frame of the engagement covered by the
agreement, the Company will pay NESC 6% (plus a 1% non-accountable
expense allowance) of gross proceeds received by the Company, and
warrants exercisable at the offering price in an amount equal to 7% of
the aggregate number of shares of common stock sold in the financing.
In addition, the agreement provides that Chadbourn will receive 2%
(plus a 1% non-accountable expense allowance) of gross proceeds and
warrants exercisable at the offering price in an amount equal to 3% of
the aggregate number of shares of common stock sold in the financing.
Pursuant to the terms of the agreement and in connection with the
completion of the private placement described above, the Company paid
NESC $1,168,800, (net of a reduction of $183,600, as agreed on March
18, 2005), and issued to NESC placement warrants to purchase 450,800
shares of the Company's common stock exercisable at $3.00 per share.
The Company also paid Chadbourn $627,600 and issued to Chadbourn
placement warrants to purchase 212,700 shares of the Company's common
stock exercisable at $3.00 per share.

F-40

PACIFIC ETHANOL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SHARE EXCHANGE TRANSACTION - On March 23, 2005, the Company completed a
Share Exchange Transaction with Accessity and the holders of the
membership interests of each of Kinergy and ReEnergy, pursuant to which
Accessity acquired all of the issued and outstanding capital stock of
the Company and all of the outstanding membership interests of Kinergy
and ReEnergy. This transaction has been accounted for as a reverse
acquisition whereby the Company is the accounting acquiror.

The Share Exchange Transaction was consummated pursuant to the terms of
a Share Exchange Agreement dated as of May 14, 2004, as amended on July
30, 2004, October 1, 2004, January 7, 2005, February 16, 2005 and March
3, 2005 executed by Accessity, the Company, Kinergy, ReEnergy and the
holders of the common stock and membership interests of the Company and
Kinergy and ReEnergy, respectively.

Immediately prior to the consummation of the Share Exchange
Transaction, Accessity reincorporated in the State of Delaware under
the name "Pacific Ethanol, Inc" through a merger of Accessity with and
into Pacific Ethanol Delaware (the "Reincorporation Merger"). In
connection with the Reincorporation Merger, the shareholders of
Accessity became stockholders of Pacific Ethanol Delaware and Pacific
Ethanol Delaware succeeded to the rights, properties and assets and
assumed the liabilities of Accessity. Also in connection with the
Reincorporation Merger, the former shareholders of Accessity, who
collectively held 2,339,414 shares of common stock of Accessity, became
the stockholders of an equal number of shares of common stock of
Pacific Ethanol Delaware and holders of options and warrants to acquire
shares of common stock of Accessity, who collectively held options and
warrants to acquire 402,667 shares of common stock of Accessity, became
holders of options and warrants to acquire an equal number of shares of
common stock of Pacific Ethanol Delaware.

In the Share Exchange Transaction, each shareholder of the Company
received one share of common stock of Pacific Ethanol Delaware for each
share of common stock of the Company they owned, the sole limited
liability company member of Kinergy received 38,750 shares of common
stock of Pacific Ethanol Delaware for each one percent of outstanding
limited liability company interest he owned, and each limited liability
company member of ReEnergy received 1,250 shares of common stock of
Pacific Ethanol Delaware for each one percent of outstanding limited
liability company interest they owned. In addition, holders of options
and warrants to acquire shares of common stock of the Company became
holders of warrants to acquire an equal number of shares of common
stock of Pacific Ethanol Delaware.

Pacific Ethanol Delaware issued an aggregate of 20,610,987 shares of
common stock to the shareholders of the Company, 3,875,000 shares of
common stock to the limited liability company member of Kinergy and an
aggregate of 125,000 shares of common stock to the limited liability
company members of ReEnergy. In addition, holders of options and
warrants to acquire an aggregate of 3,157,587 shares of common stock of
the Company are, following the consummation of the Share Exchange
Transaction, deemed to hold warrants to acquire an equal number of
shares of common stock of Pacific Ethanol Delaware. Also, following the
consummation of the Share Exchange Transaction, LDI is entitled to
convert a certain portion of its promissory note into shares of common
stock of Pacific Ethanol Delaware at the same conversion rate that was
in existence immediately prior to the Share Exchange Transaction.

F-41

PACIFIC ETHANOL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The shares of common stock of Pacific Ethanol Delaware issued, or
issuable upon exercise of outstanding options and warrants, to the
shareholders and holders of options and warrants of the Company and
limited liability company members of Kinergy and ReEnergy represented
approximately 90% of the outstanding common stock of Pacific Ethanol
Delaware on a fully-diluted basis after the closing of the Share
Exchange Transaction. Immediately following the closing of the Share
Exchange Transaction, Pacific Ethanol Delaware had an aggregate of
27,700,401 shares of common stock issued and outstanding and an
aggregate of 31,925,534 shares of common stock issued and outstanding,
calculated on a fully-diluted basis, including 4,225,133 shares of
common stock issuable upon exercise of all outstanding options,
warrants and convertible debt.

The following table summarizes the unaudited assets acquired and
liabilities assumed in connection with the Share Exchange Transaction:

Current assets............................... $ 7,014,196
Property, plant and equipment................ 6,224
Intangibles, including goodwill.............. 10,935,750
---------------
Total assets acquired..................... 17,956,170
Current liabilities.......................... 4,253,177
Other liabilities............................ 83,017
---------------
Total liabilities assumed................. 4,336,194
---------------
Net assets acquired.......................... $ 13,619,976
===============
Shares of common stock issued................ 6,489,414
===============

The purchase price represented a significant premium over the recorded
net worth of the acquired entities' assets. In deciding to pay this
premium, the Company considered various factors, including the value of
Kinergy's trade name, Kinergy's extensive market presence and history,
Kinergy's industry knowledge and expertise, Kinergy's extensive
customer relationships and expected synergies among Kinergy's and
ReEnergy's businesses and assets and the Company's planned entry into
the ethanol production business.

In connection with the Share Exchange Transaction and the Company's
acquisition of Kinergy and ReEnergy, the Company engaged a valuation
firm to determine what portion of the purchase price should be
allocated to identifiable intangible assets. Through that process, the
Company has estimated that for Kinergy, the distribution backlog is
valued at $136,000, the customer relationships are valued at $5,600,000
and the trade name is valued at $3,100,000. The Company made a $150,000
cash payment and issued stock valued at $316,250 for the acquisition of
ReEnergy. In addition, certain stockholders sold stock to the members
of ReEnergy, increasing the purchase price by $506,000 (see further
discussion below). The purchase price for ReEnergy totaled $972,250. Of
this amount, $120,000 was recorded as an intangible asset for the fair
value of a favorable option to acquire land and because the acquisition
of ReEnergy was not deemed to be an acquisition of a business, the
remaining purchase price of $852,250 was recorded as an expense for
services rendered in connection with a feasibility study. The Company
issued stock valued at $9,803,750 for the acquisition of Kinergy. In
addition, certain stockholders sold stock to the sole member Kinergy
and a related party, increasing the purchase price by $1,012,000. The

F-42

PACIFIC ETHANOL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

purchase price for Kinergy totaled $10,815,750. Goodwill directly
associated with the Kinergy acquisition therefore totaled $1,979,750.
The ReEnergy land option will expire on December 15, 2005 and will be
expensed at that time if not extended.

The Kinergy trade name is determined to have an indefinite life and
therefore, rather than being amortized, will be periodically tested for
impairment. The distribution backlog has an estimated life of six
months and customer relationships were estimated to have a ten-year
life and, as a result, will be amortized accordingly, unless otherwise
impaired at an earlier time.

In connection with the Share Exchange Transaction, Pacific Ethanol
Delaware (i) transferred DriverShield CRM Corp., a wholly-owned
subsidiary of Pacific Ethanol Delaware, to Barry Siegel, the former
Chairman of the Board, President and Chief Executive Officer of Pacific
Ethanol Delaware, (ii) issued 400,000 shares of Pacific Ethanol
Delaware's common stock to Mr. Siegel and 200,000 shares of Pacific
Ethanol Delaware's common stock to Philip B. Kart, Pacific Ethanol
Delaware's former Senior Vice President, Chief Financial Officer and
Secretary, and (iii) executed Confidentiality, Non-Competition,
Non-Solicitation and Consulting Agreements with Messrs. Siegel and
Kart, in full consideration for the agreement of each of Messrs. Siegel
and Kart to relinquish cash payments that otherwise would be due to
each of them under their respective employment agreements with Pacific
Ethanol Delaware as a result of the closing of the Share Exchange
Transaction. In addition, Pacific Ethanol Delaware sold Sentaur Corp.,
a wholly-owned subsidiary of Pacific Ethanol Delaware, to Mr. Siegel
for the cash sum of $5,000.

Immediately prior to the closing of the Share Exchange Transaction, the
founders sold these shares at the agreed upon price to CMCP. The
contribution of these shares is accounted for as a capital
contribution. However, because the shares were issued as a finder's fee
in a private offering (See Note 8), the related expense is offset
against the proceeds received, resulting in no effect on equity.

Immediately prior to the closing of the Share Exchange Transaction,
certain stockholders of the Company sold an aggregate of 250,000 shares
of the Company's common stock owned by them to the then-Chief Executive
Officer of Accessity at $0.01 per share to compensate him for
facilitating the closing of the Share Exchange Transaction. The
contribution of these shares is accounted for as a capital
contribution. However, because the shares are deemed issued to
Accessity in connection with the Share Exchange Transaction, the
related expense is offset against the cash received from Accessity,
resulting in no effect on equity.

Immediately prior to the closing of the Share Exchange Transaction, a
stockholder of the Company sold 200,000 shares of the Company's common
stock to the individual members of ReEnergy at $.01 per share, to
compensate them for facilitating the closing of the Share Exchange
Transaction. The contribution of these shares resulted in additional
non-cash services rendered in connection with feasibility study expense
of $506,000.

Immediately prior to the closing of the Share Exchange Transaction, a
founder of the Company sold 300,000 shares of the Company's common
stock to Neil Koehler, the sole member of Kinergy and an officer and
director of the Company, at $.01 per share to compensate him for
facilitating the closing of the Share Exchange Transaction. The
contribution of these shares resulted in additional Kinergy goodwill of
$759,000.

F-43

PACIFIC ETHANOL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Immediately prior to the closing of the Share Exchange Transaction, a
founder of the Company sold 100,000 shares of the Company's common
stock to Tom Koehler, a member of ReEnergy and a related party of the
sole member of Kinergy, at $.01 per share to compensate him for
facilitating the closing of the Share Exchange Transaction. The
contribution of these shares resulted in additional Kinergy goodwill of
$253,000.

RELATED PARTY NOTES PAYABLE - Pursuant to the terms of the Share
Exchange Transaction, Kinergy distributed to its sole member in the
form of a promissory note, in the amount of $ 2,095,614 Kinergy's net
worth as set forth on Kinergy's balance sheet prepared in accordance
with GAAP, as of March 23, 2005. A holdback amount of $100,000 for 30
days was provided to allow Kinergy to settle its accounts. In April
2005, Kinergy paid the balance of its net worth, up to the holdback
amount of $100,000.

Pursuant to the terms of the Share Exchange Transaction, ReEnergy
distributed to its members in the form of a promissory note in the
amount of $1,439 ReEnergy's net worth as set forth on ReEnergy's
balance sheet prepared in accordance with GAAP, as of March 23, 2005.

Effective March 30, 2005, the personal guaranty for up to a maximum
amount of $1,000,000 granted by an individual shareholder of the
Company with respect to the convertible promissory note issued to LDI
was terminated.

STOCK OPTIONS - One outstanding option granted to an employee of the
Company to acquire 25,000 shares of common stock vested on March 23,
2005 and was converted into a warrant. Non-cash compensation expense of
$232,250 was recognized to record the fair value of the warrant.

NON-CASH COMPENSATION - Pursuant to a consulting agreement (See Note
8), upon completion of the Share Exchange Transaction, the Company
issued warrants to the consultant to purchase 230,000 additional shares
of common stock that will vest ratably over a period of two years. The
warrants were recognized at the fair value as of the start of business
on March 24, 2005 in the amount of $2,139,000. The Company recorded
non-cash expense of $20,511 for consulting services vested during the
period from March 24, 2005 to March 31, 2005. The unvested warrants in
the amount of $2,118,489 will vest ratably at $89,125 per month over
the remainder of the two year period.

SERIES A PREFERRED STOCK - Effective May 17, 2005, the Company's
articles of incorporation were amended and restated, which amendment
and restatement had the effect of eliminating the Company's previously
authorized shares of Series A Preferred Stock and changing its name to
Pacific Ethanol California, Inc.

F-44

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

May 23, 2005

To the Member
Kinergy Marketing, LLC
Davis, California

We have audited the balance sheets of Kinergy Marketing, LLC (the "Company") as
of December 31, 2004, 2003 and 2002, and the related statements of income and
member's equity (deficit) and cash flows for each of 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.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kinergy Marketing, LLC as of
December 31, 2004, 2003 and 2002, and the results of its operations and its cash
flows for the years then ended, in conformity with U.S. generally accepted
accounting principles.

/S/ HEIN & ASSOCIATES LLP

F-45

KINERGY MARKETING LLC

BALANCE SHEETS

As of December 31,
2004 2003 2002
---------- ---------- ----------
ASSETS
------

CURRENT ASSETS:
Cash and cash equivalents $ 674,195 $ -- $ 231,682
Accounts receivable, related party receivable,
$361,287, $607,765 and $0 for 2004, 2003 and 2002,
respectively 2,010,531 2,583,287 411,854
Inventories 404,833 474,388 119,126
Deposit on product in transit 428,358 -- --
---------- ---------- ----------

Total current assets 3,517,917 3,057,675 762,662

PROPERTY, PLANT AND EQUIPMENT, net 6,564 2,124 3,017
---------- ---------- ----------

TOTAL ASSETS $3,524,481 $3,059,799 $ 765,679
========== ========== ==========

LIABILITIES AND MEMBER'S EQUITY (DEFICIT)
-----------------------------------------

CURRENT LIABILITIES:
Accounts payable $1,106,712 $1,710,879 $ --
Bank overdraft -- 59,668 781,421
Other Liabilities 3,261 -- --
Payable to related party -- 200,000 --
---------- ---------- ----------

Total Current liabilities 1,109,973 1,970,547 781,421

COMMITMENTS AND CONTINGENCIES (Notes 4 and 6)

MEMBER'S EQUITY (DEFICIT) 2,414,508 1,089,252 (15,742)
---------- ---------- ----------

TOTAL LIABILITIES AND MEMBER'S EQUITY (DEFICIT) $3,524,481 $3,059,799 $ 765,679
========== ========== ==========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

F-46

KINERGY MARKETING LLC

STATEMENTS OF INCOME AND MEMBER'S EQUITY (DEFICIT)

For the years ended
December 31,
------------------------------------------------
2004 2003 2002
------------ ------------ ------------

NET SALES, RELATED PARTY SALES, $10,919,801,
$6,923,376 AND $1,317,385 FOR 2004, 2003 AND 2002,
RESPECTIVELY $ 82,790,404 $ 35,539,636 $ 15,280,424

COST OF GOODS SOLD 79,580,897 33,982,527 14,945,170
------------ ------------ ------------

GROSS PROFIT 3,209,507 1,557,109 335,254

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 275,588 169,582 93,725
------------ ------------ ------------

OPERATING INCOME 2,933,919 1,387,527 241,529

OTHER INCOME (EXPENSE):
Interest income (expense) (3,537) 267 4,815
Other income (expense) (1,300) (10,800) (1,550)
------------ ------------ ------------
Total other income (expense) (4,837) (10,533) 3,265
------------ ------------ ------------

NET INCOME 2,929,082 1,376,994 244,794

MEMBER'S EQUITY (DEFICIT)
beginning of period 1,089,252 (15,742) 199,464

MEMBER'S DISTRIBUTIONS (1,603,826) (272,000) (460,000)
------------ ------------ ------------

MEMBER'S EQUITY (DEFICIT)
end of period $ 2,414,508 $ 1,089,252 $ (15,742)
============ ============ ============

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

F-47

KINERGY MARKETING LLC

STATEMENTS OF CASH FLOWS

For the years ended
December 31,
2004 2003 2002
----------- ----------- -----------

Cash Flows From Operating Activities:
Net income $ 2,929,082 $ 1,376,994 $ 244,794

Adjustments to reconcile net income to net
cash provided by (used in)
operating activities:
Depreciation 253 893 627
Changes in operating assets and liabilities:
Accounts receivable 572,756 (2,171,433) 17,531
Inventories 69,555 (355,262) (60,411)
Deposit on product in transit (428,358) -- --
Bank overdraft (59,668) 59,668 --
Accounts payable (604,167) 929,458 (190,605)
Other liabilities 3,261 -- --
----------- ----------- -----------

Net cash provided by (used in) operating
activities 2,482,714 (159,682) 11,936
----------- ----------- -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (4,693) -- (2,204)
----------- ----------- -----------

Net cash used in investing activities (4,693) -- (2,204)
----------- ----------- -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from related party note payable -- 200,000 --
Payments on related party note payable (200,000) -- --
Distributions to member (1,603,826) (272,000) (460,000)
----------- ----------- -----------

Net cash used in financing activities (1,803,826) (72,000) (460,000)
----------- ----------- -----------

NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 674,195 (231,682) (450,268)
CASH AND CASH EQUIVALENTS,
beginning of period -- 231,682 681,950
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 674,195 $ -- $ 231,682
=========== =========== ===========

SUPPLEMENTAL INFORMATION:
Interest paid $ 5,519 $ -- $ --
=========== =========== ===========
Income taxes paid $ 800 $ 800 $ 2,400
=========== =========== ===========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

F-48

KINERGY MARKETING LLC

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND NATURE OF OPERATIONS:
--------------------------------------

Kinergy Marketing, LLC, (the "Company") was incorporated as a limited
liability company on September 13, 2000, under the laws of the state of
Oregon, to acquire and distribute ethanol fuel in California, Nevada,
Arizona and Oregon. The Company is located in Davis, California.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------

CASH AND CASH EQUIVALENTS - For financial statement purposes, the
Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.

ALLOWANCE FOR DOUBTFUL ACCOUNTS - The Company maintains an allowance
for doubtful accounts for estimated losses resulting from the inability
of its customers to make required payments. The allowance is determined
through an analysis of the aging of accounts receivable and assessments
of risk that are based on historical trends and an evaluation of the
impact of current and projected economic conditions. The Company
evaluates the past-due status of its accounts receivable based on
contractual terms of sale. If the financial condition of the Company's
customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required. At
December 31, 2004, 2003 and 2002, management of the Company believed
that all receivables were collectible, and thus an allowance for bad
debt was not established. The Company had no bad debt expense for the
years ended December 31, 2004, 2003 and 2002.

INVENTORY - Inventory consists of bulk ethanol fuel and is valued at
the lower of cost or market; cost being determined on a first-in
first-out basis. Shipping and handling costs are classified as a
component of cost of goods sold in the accompanying statements of
income and member's equity.

PROPERTY, PLANT AND EQUIPMENT - Property and equipment is recorded at
cost. Depreciation of property and equipment is computed using the
straight-line method over the estimated useful lives from 3 to 5 years.
The cost of normal maintenance and repairs is charged to operations as
incurred. Material expenditures that increase the life of an asset are
capitalized and depreciated over the estimated remaining useful life of
the asset. The cost of fixed assets sold, or otherwise disposed of, and
the related accumulated depreciation or amortization are removed from
the accounts, and any resulting gains or losses are reflected in
current operations.

REVENUE RECOGNITION - The Company recognizes revenue upon delivery of
ethanol to customers' designated ethanol tank. Shipments are made to
customers both directly from suppliers and from the Company's
inventory. Shipment modes are by truck or rail. Ethanol that is shipped
by rail originates primarily in the Midwest and takes from 10 to 14
days from departure of shipment, for delivery to the customer or to one
of four terminals in California and Oregon. Trucks are used for local
deliveries and such deliveries are completed the same day as shipment.

F-49

KINERGY MARKETING LLC

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

INCOME TAXES - As a limited liability company, the Company is generally
not subject to federal and state income taxes directly. Rather, each
member is subject to federal and state income taxes based on its share
of the Company's income or loss.

USE OF ESTIMATES - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

The following methods and assumptions were used in estimating the
indicated fair values of the Company's financial instruments:
o Cash and cash equivalents, accounts receivable and
accounts payable: The carrying amounts approximate
fair value because of the short maturity of those
instruments.
o Debt: The fair value of the Company's debt is
estimated based on current rates offered to the
Company for similar debt and approximates carrying
value.

CONCENTRATION OF CREDIT RISK - Financial instruments that subject the
Company to credit risk consist of cash balances maintained in excess of
federal depository insurance limits and accounts receivable, which have
no collateral or security. The accounts maintained by the Company at
financial institutions are insured by the Federal Deposit Insurance
Corporation (FDIC) up to $100,000. At December 31, 2004 the uninsured
balance was $1,091,967 and at December 31, 2003 and 2002, there were no
uninsured balances. The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant risk of loss
on cash.

Credit risk represents the accounting loss that would be recognized at
the reporting date if counterparties failed completely to perform as
contracted. Concentrations of credit risk (whether on or off balance
sheet) that arise from financial instruments exist for groups of
customers or counterparties when they have similar economic
characteristics that would cause their ability to meet contractual
obligations to be similarly affected by changes in economic or other
conditions described below.

Financial instruments that potentially subject the Company to
concentrations of credit risk consist of accounts receivable, which
have no collateral or security. The Company sells ethanol fuel on
account to select companies located in California, Nevada, Arizona and
Oregon. During the year ended December 31, 2004, the Company had sales
to four customers that represented 13%, 12%, 12% and 12% of net sales.
During the year ended December 31, 2003, the Company had sales to four
customers that represented 20%, 14%, 13% and 10% of net sales. During
the year ended December 31, 2002, the Company had sales to three
customers that represented 34%, 24%, and 11% of net sales. As of
December 31, 2004, 2003 and 2002, the Company had receivables of
approximately $865,175, $1,337,240, and $338,256 from these customers,

F-50

KINERGY MARKETING LLC

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

representing, in the aggregate, 43%, 52% and 82%, respectively, of
total accounts receivable. The Company performs periodic credit
evaluations of its ongoing customers and generally does not require
collateral. Credit losses have traditionally been minimal and such
losses have been within management's expectations.

RISKS AND UNCERTAINTIES - The Company purchases ethanol fuel from
companies located primarily in the Midwest. During the year ended
December 31, 2004, the Company purchased ethanol from three vendors
that represented 27%, 23% and 14% of all purchases. During the year
ended December 31, 2003, the Company purchased ethanol from three
vendors that represented 44%, 27% and 15% of all purchases. During the
year ended December 31, 2002, the Company purchased ethanol from two
vendors that represented 60% and 34% of all purchases.

LIMITATION ON LIABILITY - Members are generally not liable for the
debts, obligations or liabilities of the Company.

3. RELATED PARTY NOTE PAYABLE:
---------------------------

On November 5, 2003, the Company executed an unsecured note payable in
the amount of $200,000 payable to Pacific Ethanol, Inc., a California
corporation ("PEI California"), which bears an annual interest of 5%.
The note and related accrued interest was due in one payment on January
4, 2004. On January 23, 2004, the Company paid the principal balance
plus accrued interest of $2,164 on the note payable to PEI California.
The sole member of the Company is an officer and director of PEI
California.

4. COMMITMENTS AND CONTINGENCIES:
------------------------------

OPEN LETTERS-OF-CREDIT - On June 3, 2002, as amended on September 30,
2003, the Company was issued an Irrevocable Standby Letter of Credit by
Bank of Portland, for any sum not to exceed a total of $200,000. The
designated beneficiary is Archer Daniels Midland Co., a vendor of the
Company, and the letter is valid through March 31, 2004. On March 31,
2004, the Company was issued an Irrevocable Standby Letter of Credit by
Washington Mutual Bank, FA, for any sum not to exceed a total of
$200,000. The designated beneficiary is Archer Daniels Midland Co., a
vendor of the Company, and the letter was valid through September 30,
2004.

On December 4, 2002, as amended on September 30, 2003, the Company was
issued an Irrevocable Standby Letters of Credit by Bank of Portland,
for any sum not to exceed a total of $200,000. The designated
beneficiary is Chief Ethanol Fuels, Inc., a vendor of the Company, and
the letter is valid through March 31, 2004. On March 31, 2004, the
Company was issued an Irrevocable Standby Letter of Credit by
Washington Mutual Bank, FA, for any sum not to exceed a total of
$300,000. The designated beneficiary is Chief Ethanol Fuels, Inc., a
vendor of the Company, and the letter was valid through September 30,
2004.

On October 1, 2004, the Company was issued an Irrevocable Standby
Letter of Credit by Comerica Bank, for any sum not to exceed a total of
$300,000. The designated beneficiary is a vendor of the Company, and
the letter was valid through March 31, 2005. (See Note 6)

F-51

KINERGY MARKETING LLC

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

At December 31, 2004, 2003 and 2002 there was no debt outstanding
related to these open letters of credit.

LINE OF CREDIT - On March 22, 2004, the Company entered into a
$2,000,000 revolving line of credit with Washington Mutual Bank, FA
which was terminated on September 24, 2004. The line is collateralized
by inventory, receivables and general intangibles of the Company.

On September 24, 2004, the Company entered into a $2,000,000 revolving
line of credit with Comerica Bank which expires on October 5, 2005.
This line replaced the Washington Mutual Bank line and is
collateralized by inventory, receivables and general intangibles of the
Company. The line of credit is personally guaranteed by Neil Koehler,
sole member of the Company. There were no outstanding borrowings as of
December 31, 2004.

TERMINAL CONTRACT - The Company is party to four terminal contracts
relating to the storage of ethanol. The contracts expire on different
dates, ranging from March 31, 2005 through October 31, 2005, and are
renewable on a year-to-year basis at end of the term. All four
agreements are cancelable by either party at the end of the base term,
or with 30 - 90 days notice prior to the end of any extended term. Fees
associated with these contracts vary, and are dependent either on the
volume of product in storage or on the volume of product delivered. One
of the terminals charges a minimum monthly fee of $1,004 in addition to
the variable rate. Storage fees paid to these terminals were $117,526,
$24,742, and $12,590 for December 31, 2004, 2003 and 2002,
respectively, and are recorded as cost of goods sold in the
accompanying statements of income and member's equity.

PURCHASE COMMITMENTS - During 2004, 2003 and 2002, the Company entered
into six-month purchase contracts with its major vendors to acquire
certain quantities of ethanol, at specified prices. The contracts run
from April through September, and from October through March. On
October 1, 2004, the contracts were renewed and renegotiated to extend
through March 31, 2005. The outstanding balance on the new contracts
was $16,663,287 at December 31, 2004.

SALES COMMITMENTS - During 2004, 2003 and 2002, the Company entered
into six-month sales contracts with its major customers to sell certain
quantities of ethanol, at specified prices. The contracts run from
April through September, and from October through March. On October 1,
2004, the contracts were renewed and renegotiated to extend through
March 31, 2005. The outstanding balance on the new contracts was
$22,757,891 at December 31, 2004.

OPERATING LEASES - The Company leases office space in Davis,
California. The Company entered into a 12 month lease on December 1,
2004 at a rate of $1,120 per month. The Company also continues to rent
the prior existing office space month-to-month with plans to vacate in
2005. Total rent paid for the years ended December 31, 2004, 2003 and
2002 was $4,320, $3,070 and $2,890 respectively.

F-52

KINERGY MARKETING LLC

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. RELATED PARTY TRANSACTIONS:
---------------------------

For the year ended December 31, 2003, the Company paid consulting fees
of approximately $10,000 to Kinergy Resources, LLC, an entity owned in
part by the Company's sole member. There were no payments made to
Kinergy Resources, LLC during the year ended December 31, 2004 or 2002.

During the years ended December 31, 2004, 2003 and 2002, the Company
paid accounting fees totaling $20,798, $24,000 and $32,000 respectively
to Kinergy, LLC, a company owned by a relative of the Company's sole
member.

The Company paid consulting fees related to market development, sales
support, regulatory and governmental affairs of $110,000 and $15,000
and to a relative of the Company's sole member for the years ended
December 31, 2004 and 2003, respectively. There were no such fees paid
during the year ended December 31, 2002.

On August 31, 2004, the Company reimbursed PEI California, a related
party, for audit fees paid on behalf of the Company.

6. SUBSEQUENT EVENTS:
------------------

LETTERS OF CREDIT - On April 1, 2005, the Company renewed an
Irrevocable Standby Letter of Credit by Comerica Bank, for any sum not
to exceed a total of $400,000. The designated beneficiary is a vendor
of the Company, and the letter is valid through September 30, 2005.

On April 1, 2005, the Company renewed an Irrevocable Standby Letter of
Credit by Comerica Bank, for any sum not to exceed a total of $300,000.
The designated beneficiary is a vendor of the Company, and the letter
is valid through September 30, 2005.

SALE OF THE COMPANY - The Company and its sole member are parties to a
Share Exchange Agreement with Pacific Ethanol, Inc, a Delaware
corporation ("Pacific Ethanol Delaware"), PEI California, the
shareholders of PEI California, ReEnergy, LLC, a California limited
liability company ("ReEnergy"), and the holders of the membership
interests of ReEnergy, pursuant to which the Company was acquired on
March 23, 2005. All of the issued and outstanding shares of common
stock of PEI California and all of the outstanding membership interests
of each of the Company and ReEnergy were acquired by Pacific Ethanol
Delaware. Immediately prior to the consummation of the share exchange
transaction, Pacific Ethanol Delaware's predecessor, Accessity Corp., a
New York corporation ("Accessity"), reincorporated in the State of
Delaware under the name Pacific Ethanol, Inc. through a merger of
Accessity with and into its then-wholly-owned Delaware subsidiary named
Pacific Ethanol, Inc., which was formed for the purpose of effecting
the reincorporation. The Company is now a wholly-owned subsidiary of
Pacific Ethanol Delaware.

F-53

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

May 23, 2005

To the Members
ReEnergy LLC
Davis, California

We have audited the balance sheets of ReEnergy LLC (the "Company") as of
December 31, 2004, 2003 and 2002, and the related statements of operations,
members' equity (deficit) and cash flows for each of 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.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ReEnergy LLC as of December 31,
2004, 2003 and 2002, and the results of its operations and its cash flows for
the years then ended, in conformity with U.S. generally accepted accounting
principles.

/S/ HEIN & ASSOCIATES LLP

F-54

REENERGY LLC

BALANCE SHEETS

As of December 31,
-------------------------------
2004 2003 2002
------- ------- -------
ASSETS
------

CURRENT ASSETS
Cash $ 2,739 $12,739 $42,770
------- ------- -------

TOTAL ASSETS $ 2,739 $12,739 $42,770
======= ======= =======

LIABILITIES AND MEMBERS' EQUITY
-------------------------------

CURRENT LIABILITIES
Accounts payable $ 154 $ -- $10,428

COMMITMENT (Note 4) --

MEMBERS' EQUITY
Members' Equity 2,585 12,739 32,342
------- ------- -------

TOTAL LIABILITIES AND MEMBERS' EQUITY $ 2,739 $12,739 $42,770
======= ======= =======

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
FINANCIAL STATEMENTS.

F-55

REENERGY LLC

STATEMENTS OF OPERATIONS

For the years ended December 31,
-------------------------------------
2004 2003 2002
-------- -------- --------
NET SALES $ -- $ -- $ --
COST OF SALES -- -- --
-------- -------- --------
GROSS PROFIT -- -- --

SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 9,854 48,803 30,720
-------- -------- --------

OPERATING LOSS (9,854) (48,803) (30,720)

PROVISION FOR INCOME TAXES (800) (800) (800)
-------- -------- --------

NET LOSS $(10,654) $(49,603) $(31,520)
======== ======== ========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
FINANCIAL STATEMENTS.

F-56

REENERGY LLC
STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2004

Members
-----------------------------------------------------------------------------------------
Kinergy
Flin-Mac, Inc. Resources LLC Kent Kaulfus Tom Koehler Total
------------- ------------- ------------- ------------- -------------

Balances, December 31, 2001 as
previously reported $ 2,077 $ 2,078 $ -- $ -- $ 4,155
Prior Period Adjustment (1,346) (1,347) -- -- (2,693)
------------- ------------- ------------- ------------- -------------
Balances, January 1, 2002 as
restated 731 731 -- -- 1,462
Contributions 31,200 31,200 -- -- 62,400
Net loss (15,760) (15,760) -- -- (31,520)
------------- ------------- ------------- ------------- -------------
Balances, December 31, 2002 16,171 16,171 -- -- 32,342

Contributions 15,000 15,000 -- -- 30,000
Net loss (16,534) (16,534) (16,535) -- (49,603)
------------- ------------- ------------- ------------- -------------
Balances, December 31, 2003 14,637 14,637 (16,535) -- 12,739
Contributions -- -- -- 500 500
Net loss (2,503) (2,503) (2,503) (3,145) (10,654)
------------- ------------- ------------- ------------- -------------

Balances, December 31, 2004 $ 12,134 $ 12,134 $ (19,038) $ (2,645) $ 2,585
============= ============= ============= ============= =============

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

F-57

REENERGY LLC

STATEMENTS OF CASH FLOWS

For the years ended December 31,
------------------------------------
2004 2003 2002
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(10,654) $(49,603) $(31,520)

Adjustments to reconcile net loss
to net cash used in operating activities:
Changes in operating assets and liabilities:
Accounts Payable 154 (10,428) 10,428
-------- -------- --------
Net cash used in
operating activities (10,500) (60,031) (21,092)
-------- -------- --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Contributed capital 500 30,000 62,400
-------- -------- --------
Net cash provided by
financing activities 500 30,000 62,400
-------- -------- --------

NET INCREASE (DECREASE) IN CASH (10,000) (30,031) 41,308

CASH, beginning of period 12,739 42,770 1,462
-------- -------- --------

CASH, end of period $ 2,739 $ 12,739 $ 42,770
======== ======== ========

SUPPLEMENTAL INFORMATION:
Income taxes paid $ 800 $ 800 $ 800
======== ======== ========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

F-58

REENERGY LLC

NOTES TO FINANCIAL STATEMENTS

1. RESTATEMENT OF YEAR ENDED 2003
------------------------------

Upon consideration by current management of the previous accounting
treatment of certain expenditures in the years 2001, 2002 and 2003, in
the amounts of $2,693, $30,333 and $48,803 respectively, it has been
determined that such amounts, pursuant to SOP 98-5 ("Statement of
Position 98-5 Reporting on the Costs of Start-Up Activities"), should
be expensed rather than capitalized. These financial statements have
been restated to account for that change.

2. ORGANIZATION AND NATURE OF OPERATIONS:
--------------------------------------

ReEnergy LLC ("the Company"), a California limited liability
corporation, was formed on October 4, 2001. ReEnergy LLC is a project
development company formed to evaluate the feasibility of building an
ethanol production facility in California.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------

ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.

CASH EQUIVALENTS - For financial statement purposes, the Company
considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. There were no cash
equivalents as of December 31, 2004, 2003 and 2002.

LIMITATION ON LIABILITY - Members are generally not liable for the
debts, obligations or liabilities of the Company.

4. RELATED PARTY TRANSACTIONS:
---------------------------

The Company has entered into a lease agreement with a member along with
an option on 89 acres of land that is owned personally by this member.
The member has received a 33.33% interest in ReEnergy for this option
and his expertise in the bio-product area. The property has been
appraised and if the option is exercised the member will receive fair
market value for his property based on the appraised value. As of May
2004, the member's interest was changed to 23.5%.

On August 28, 2003, the Company entered into an agreement with Pacific
Ethanol, Inc., a California corporation ("PEI California"), for an
option to sell 89.3 acres in Visalia, California at a price of $12,000
per acre for the purpose of building an ethanol production facility.

For the year ended December 31, 2003, the Company paid consulting fees
of $27,000 to Celilo Group an entity owned in part by one of the
Company's members. There were no payments made to Celilo Group during
the year ended December 31, 2004 or 2002.

F-59

REENERGY LLC

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

In May 2004, Tom Koehler, as an individual, acquired a 29.5% Membership
interest in the Company. Mr. Koehler also holds a membership interest
through his ownership in Kinergy Resources, LLC.

5. SUBSEQUENT EVENTS:
------------------

SALE OF THE COMPANY - The Company and its members are parties to a
Share Exchange Agreement with Pacific Ethanol, Inc, a Delaware
corporation ("Pacific Ethanol Delaware"), PEI California, the
shareholders of PEI California, Kinergy Marketing, LLC, an Oregon
limited liability company ("Kinergy"), and the holders of the
membership interests of Kinergy, pursuant to which the Company was
acquired on March 23, 3005. All of the issued and outstanding shares of
common stock of PEI California and all of the outstanding membership
interests of each of the Company and Kinergy were acquired by Pacific
Ethanol Delaware. Immediately prior to the consummation of the share
exchange transaction, Pacific Ethanol Delaware's predecessor, Accessity
Corp., a New York corporation ("Accessity"), reincorporated in the
State of Delaware under the name Pacific Ethanol, Inc. through a merger
of Accessity with and into its then-wholly-owned Delaware subsidiary
named Pacific Ethanol, Inc., which was formed for the purpose of
effecting the reincorporation. The Company is now a wholly-owned
subsidiary of Pacific Ethanol Delaware.

F-60

INDEX TO PRO FORMA FINANCIAL STATEMENTS

Pro Forma Financial Information
-------------------------------

On March 23, 2005, the Company completed a Share Exchange Transaction with
Accessity and the holders of the membership interests of each of Kinergy and
ReEnergy, pursuant to which Accessity acquired all of the issued and outstanding
capital stock of the Company and all of the outstanding membership interests of
Kinergy and ReEnergy. This transaction has been accounted for as a reverse
acquisition whereby the Company is the accounting acquiror.

The unaudited pro forma combined consolidated statements of operations do
not reflect any potential cost savings that may be realized following the
acquisition. The pro forma adjustments and assumptions are based on estimates,
evaluations and other data currently available and, in the Company's opinion,
provide a reasonable basis for the fair presentation of the estimated effects
directly attributable to the acquisition and related transactions. The unaudited
pro forma combined statements of operations are provided for illustrative
purposes only and are not necessarily indicative of what the consolidated
results of operations or financial position would actually have been had the
acquisition occurred on January 1, 2004, nor do they represent a forecast of the
consolidated results of operations or financial position for any future period
or date. Pro forma condensed consolidated balance sheet data is not presented
because the balance sheets of Kinergy Marketing, LLC and ReEnergy, LLC and
related purchase accounting adjustments are consolidated and included in the
financial statements included in our quarterly report on Form 10-QSB for the
quarterly period ended September 30, 2005 filed with the Securities and Exchange
Commission on November 14, 2005. Pro forma adjustments for Accessity Corp. are
not included because they would have no material impact on the pro forma
financial information presented.

All information contained herein should be read in conjunction with
Accessity's annual report on Form 10-KSB for the year ended December 31, 2004
and the financial statements and notes thereto, and the financial statements and
notes thereto of PEI California, Kinergy and ReEnergy included herein and the
notes to unaudited pro forma financial information included herein. The
following pro forma financial information is included in this report:

Page
----

Unaudited Pro Forma Combined Consolidated Statements of
Operations for the Nine Months Ended September 30, 2005...............F-62

Notes to Unaudited Pro Forma Combined Consolidated Statements
of Operations for the Nine Months Ended September 30, 2005............F-63

Unaudited Pro Forma Combined Consolidated Statements of
Operations for the Year Ended December 31, 2004.......................F-64

Notes to Unaudited Pro Forma Combined Consolidated Statements
of Operations for the Year Ended December 31, 2004....................F-65

F-61

UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005

PACIFIC PRO FORMA PRO FORMA
REENERGY KINERGY ETHANOL ADJUSTMENTS COMBINED
------------ ------------ ------------ ------------ ------------
(NOTE 1)

Net sales $ -- $ 23,605,252 $ 51,530,735 $ -- $ 75,135,987

Cost of goods sold -- 23,207,602 49,695,870 -- 72,903,472
------------ ------------ ------------ ------------ ------------
Gross profit -- 397,650 1,834,865 -- 2,232,515
------------ ------------ ------------ ------------ ------------
Selling, general and administrative expenses 346 72,240 3,999,653 122,740 (b)
128,332 (c) 4,323,311
Services rendered in connection with feasibility study -- -- 852,250 -- 852,250
Non-cash compensation and consulting fees 1,749,967 246,864 (d) 1,996,831
------------ ------------ ------------ ------------ ------------

Operating income (loss) (346) 325,410 (4,767,005) (497,936) (4,939,877)

Other income (expense):
Other income -- -- 27,726 -- 27,726
Other (expense) -- -- (459) -- (459)
Interest income (expense) -- 616 (61,007) -- (60,391)
------------ ------------ ------------ ------------ ------------
Total other income (expense) -- 616 (33,740) -- (33,124)
------------ ------------ ------------ ------------ ------------
Net income (loss) before provision for income taxes (346) 326,026 (4,800,745) (497,936) (4,973,001)

Provision for income taxes 800 -- 5,600 -- 6,400
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (1,146) $ 326,026 $ (4,806,345) $ (497,936) $ (4,979,401)
============ ============ ============ ============ ============

Loss per share
Basic and diluted $ (0.20) $ (0.18)
Weighted average number of common shares, basic
and diluted 23,841,380 4,180,376 (a) 28,021,756

SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005

F-62

NOTES TO UNAUDITED PRO FORMA
COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005

1. (a) Reflects the weighted average of the 14,089,414 shares issued in
connection with the March 2005 private placement and the Share
Exchange Transaction as if they had been outstanding since
January 1, 2005.

(b) To reflect compensation arrangements for the new management upon the
consummation of the Share Exchange Transaction.

(c) To record the amortization of certain acquired intangible assets
relating to distribution backlog and customer relationships over their
estimated useful lives of six months and 10 years, respectively.

(d) To record warrants of 930,000 and 230,000 shares granted to a
consultant for public and investor relations during 2004, which vest
ratably over one year and two years, respectively, and are directly
associated with the Share Exchange Transaction, and the related
amortization of non-cash charges for the year ended December 31, 2004.

F-63

UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004

PACIFIC PRO FORMA PRO FORMA
REENERGY KINERGY ETHANOL ADJUSTMENTS COMBINED
------------ ------------ ------------ ------------ ------------
(NOTE 1)

NET SALES $ -- $ 82,790,404 $ 19,764 $ -- $ 82,810,168

COST OF GOODS SOLD -- (79,580,897) (12,523) -- (79,593,420)
------------ ------------ ------------ ------------ ------------
GROSS PROFIT -- 3,209,507 7,241 -- 3,216,748
------------ ------------ ------------ ------------ ------------

SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 9,854 275,588 1,070,010 --
635,000 (b) --
696,000 (c) 2,686,452
SERVICES RENDERED IN CONNECTION
WITH FEASIBILITY STUDY -- -- -- 852,250 (f) 852,250
NON-CASH COMPENSATION AND
CONSULTING FEES -- -- 1,207,500 1,242,000 (d) --
232,250 (e) 2,681,750
------------ ------------ ------------ ------------ ------------

OPERATING INCOME (LOSS) (9,854) 2,933,919 (2,270,269) (3,657,500) (3,003,704)

OTHER EXPENSE:
Other expense (1,300) (2,166) -- (3,466)
Interest expense -- (3,537) (528,532) -- (532,069)
------------ ------------ ------------ ------------ ------------
Total other expense -- (4,837) (530,698) -- (535,535)
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) BEFORE
PROVISION FOR INCOME TAXES (9,854) 2,929,082 (2,800,967) (3,657,500) (3,539,239)

PROVISION FOR INCOME TAXES (800) (1,600) -- (2,400)
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (10,654) $ 2,929,082 $ (2,802,567) $ (3,657,500) $ (3,541,639)
============ ============ ============ ============ ============

LOSS PER SHARE
Basic and diluted $ (0.23) $ (0.13)
Weighted average number of
common shares, basic and
diluted 12,396,895 14,089,414 (a) 26,486,309

SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004

F-64

NOTES TO UNAUDITED PRO FORMA
COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004

1. (a) Reflects the weighted average of 14,089,414 shares to be issued in
connection with the March 2005 private placement and the Share
Exchange Transaction.

(b) To reflect compensation arrangements for the new management upon the
consummation of the Share Exchange Transaction.

(e) To record employee non-cash compensation valued at $232,250 for
options vested into a warrant upon consummation of the Share Exchange
Transaction.

(f) To record services rendered in connection with feasibility study
expense related to the building of an ethanol plant in Visalia,
California.

F-65

PACIFIC ETHANOL, INC.

PROSPECTUS

, 2005

WE HAVE NOT AUTHORIZED ANY DEALER, SALESMAN OR OTHER PERSON TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND ANY ACCOMPANYING SUPPLEMENT TO THIS PROSPECTUS. YOU MUST NOT RELY
UPON ANY INFORMATION OR REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR ANY
ACCOMPANYING PROSPECTUS SUPPLEMENT. THIS PROSPECTUS AND ANY ACCOMPANYING
SUPPLEMENT TO THIS PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED
SECURITIES TO WHICH THEY RELATE, NOR DO THIS PROSPECTUS AND ANY ACCOMPANYING
SUPPLEMENT TO THIS PROSPECTUS CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF
AN OFFER TO BUY SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. THE
INFORMATION CONTAINED IN THIS PROSPECTUS AND ANY ACCOMPANYING SUPPLEMENT TO THIS
PROSPECTUS IS ACCURATE AS OF THE DATES ON THEIR COVERS. WHEN WE DELIVER THIS
PROSPECTUS OR A SUPPLEMENT OR MAKE A SALE PURSUANT TO THIS PROSPECTUS OR A
SUPPLEMENT, WE ARE NOT IMPLYING THAT THE INFORMATION IS CURRENT AS OF THE DATE
OF THE DELIVERY OR SALE.

PART II
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth all expenses to be paid by the registrant in
connection with this offering. All amounts shown are estimates except for the
SEC registration fee.

SEC registration fee $ 12,154.00
Legal fees and expenses 150,000.00
Accounting fees and expenses 34,000.00
Printing expenses 5,000.00
Blue sky fees and expenses --
Transfer agent and registrar fees and expenses --
Miscellaneous $ --
------------
Total $ 201,154.00
============

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to officers,
directors and other corporate agents in terms sufficiently broad to permit
indemnification under certain circumstances and subject to certain limitations,
such as if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
registrant, and with respect to any criminal proceeding, had no reasonable cause
to believe such person's conduct was unlawful.

As permitted to Section 145 of the Delaware General Corporation Law, the
registrant's certificate of incorporation includes a provision that eliminates
the personal liability of its directors of monetary damages for breach of their
fiduciary duty as directors.

In addition, as permitted by Section 145 of the Delaware General
Corporation Law, the bylaws of the registrant provide that:

o the registrant shall indemnify its directors and officers for serving
the registrant in those capacities or for serving other business
enterprises at the registrant's request, to the fullest extent
permitted by Delaware law;
o the registrant may, in its discretion, indemnify employees and agents
in those circumstances where indemnification is not required by law;
o the registrant is required to advance expenses, as incurred, to its
directors and officers in connection with defending a proceeding,
except that such director or officer shall undertake to repay such
advance if it is ultimately determined that such person is not
entitled to indemnification;
o the rights conferred in the bylaws are not exclusive, and the
registrant is authorized to enter into indemnification agreements with
its directors, officers, employees and agents and to obtain insurance
to indemnify such persons; and
o the Registrant may not retroactively amend the bylaw provisions to
reduce its indemnification obligations to directors, officers,
employees and agents.

II-1

The registrant's policy is to enter into separate indemnification
agreements with each of its directors and officers that provide the maximum
indemnity allowed to directors and officers by Section 145 of the Delaware
General Corporation Law and which allow for additional procedural protections.
The registrant also maintains directors' and officers' insurance to insure those
persons against various liabilities.

Registration rights agreements between the registrant and various investors
provide for cross-indemnification in connection with registration of the
registration's common stock on behalf of those investors.

These indemnification provisions and the indemnification agreements entered
into between the registrant and its officers and directors may be sufficiently
broad to permit indemnification of the registrant's officers and directors for
liabilities (including reimbursement of expenses incurred) arising under the
Securities Act.

Reference is made to the following documents filed as exhibits to this
registration statement regarding relevant indemnification provisions described
above and elsewhere herein.

EXHIBIT
DOCUMENT NUMBER
-------- ------
Certificate of Incorporation 3.1
Bylaws 3.2
Form of Indemnification Agreement 10.5
Form of Registration Rights Agreement 4.1
Form of Registration Rights Agreement 4.4
Form of Registration Rights Agreement 4.6
Form of Registration Rights Agreement 4.8

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

In March 2005, we completed the Share Exchange Transaction with the
shareholders of PEI California, and the holders of the membership interests of
each of Kinergy and ReEnergy, pursuant to which we acquired all of the issued
and outstanding capital stock of PEI California and all of the outstanding
membership interests of Kinergy and ReEnergy. In connection with the Share
Exchange Transaction, we issued an aggregate of 20,610,987 shares of common
stock to the shareholders of PEI California, 3,875,000 shares of common stock to
the limited liability company member of Kinergy and an aggregate of 125,000
shares of common stock to the limited liability company members of ReEnergy.

In March 2005, we issued 150,000 shares of common stock to an independent
contractor for services rendered as a finder in connection with the Share
Exchange Transaction.

In March 2005, we issued to Liviakis Financial Communications, Inc. a
warrant to purchase 230,000 shares of common stock at an exercise price of
$.0001 per share for certain investor relations and other services to be
rendered under a consulting agreement with PEI California. The warrant became
issuable upon consummation of the Share Exchange Transaction.

In March 2005, we issued a replacement warrant to purchase 25,000 shares of
common stock at an exercise price of $0.01 per share. This warrant replaced an
option issued by PEI California to an employee of PEI California in accordance
with terms of the Share Exchange Transaction.

II-2

In March 2005, we issued to Philip B. Kart, a former officer, 200,000
shares of common stock in consideration of Mr. Kart's obligations under a
Confidentiality, Non-Competition, Non-Solicitation and Consulting Agreement that
was entered into in connection with the Share Exchange Transaction.

In March 2005, we issued to Barry Siegel, a former officer and director,
400,000 shares of common stock in consideration of Mr. Siegel's obligations
under a Confidentiality, Non-Competition, Non-Solicitation and Consulting
Agreement that was entered into in connection with the Share Exchange
Transaction.

On May 27, 2005 we issued 664,879 shares of common stock upon conversion by
a creditor of $997,318 in principal value of a convertible note.

On June 23, 2005, we issued an aggregate of 70,000 shares of common stock
to two officers as signing bonuses in connection with their acceptance of
employment.

On June 24, 2005, we issued an aggregate of 28,749 shares of common stock
to a consultant and two transferees of that consultant upon exercise of
outstanding warrants with exercise prices of $.0001 per share for total gross
proceeds of approximately $2.87.

On July 26, 2005 we issued options to purchase an aggregate of 115,000
shares of our common stock to five of our non-employee directors at a per share
exercise price of $8.25.

On July 28, 2005 we issued options to purchase an aggregate of 30,000
shares of our common stock to two of our non-employee directors at a per share
exercise price of $8.30.

On August 10, 2005 we issued options to purchase an aggregate of 425,000
shares of our common stock to an executive officer at a per share exercise price
of $8.03.

On August 10, 2005 we issued options to purchase an aggregate of 75,000
shares of our common stock to an executive placement and consultancy firm at a
per share exercise price of $8.03.

On September 1, 2005 we issued options to purchase an aggregate of 160,000
shares of our common stock to two employees at a per share exercise price of
$6.63.

On September 9, 2005, we issued an aggregate of 6,906 shares of common
stock to three transferees of a placement agent upon cashless exercises of
outstanding warrants, which cashless exercises resulted in the cancellation of
2,094 shares of common stock.

On September 23, 2005, we issued 28,750 shares of common stock to a
consultant and three transferees of that consultant upon exercise of outstanding
warrants with exercise prices of $.0001 per share for total gross proceeds of
approximately $2.88.

The issuances of our securities described above were made in reliance upon
the exemption from registration available under Section 4(2) of the Securities
Act, among others, as transactions not involving a public offering. This
exemption was claimed on the basis that these transactions did not involve any
public offering and the purchasers in each offering were accredited or
sophisticated and had sufficient access to the kind of information registration
would provide. In each case, appropriate investment representations were
obtained and stock certificates were issued with restrictive legends.

II-3

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) EXHIBITS.

The following exhibits are included or incorporated herein by reference.

EXHIBIT
NUMBER DESCRIPTION
------ -----------

2.1 Agreement and Plan of Merger dated March 23, 2005 between the
Registrant and Accessity Corp. (1)

2.2 Share Exchange Agreement dated as of May 14, 2004 by and among
Accessity Corp., Pacific Ethanol, Inc., Kinergy Marketing, LLC,
ReEnergy, LLC and the other parties named therein (1)

2.3 Amendment No. 1 to Share Exchange Agreement dated as of July 29, 2004
by and among Accessity Corp., Pacific Ethanol, Inc., Kinergy
Marketing, LLC, ReEnergy, LLC and the other parties named therein (1)

2.4 Amendment No. 2 to Share Exchange Agreement dated as of October 1,
2004 by and among Accessity Corp., Pacific Ethanol, Inc., Kinergy
Marketing, LLC, ReEnergy, LLC and the other parties named therein (1)

2.5 Amendment No. 3 to Share Exchange Agreement dated as of January 7,
2005 by and among Accessity Corp., Pacific Ethanol, Inc., Kinergy
Marketing, LLC, ReEnergy, LLC and the other parties named therein (1)

2.6 Amendment No. 4 to Share Exchange Agreement dated as of February 16,
2005 by and among Accessity Corp., Pacific Ethanol, Inc., Kinergy
Marketing, LLC, ReEnergy, LLC and the other parties named therein (1)

2.7 Amendment No. 5 to Share Exchange Agreement dated as of March 3, 2005
by and among Accessity Corp., Pacific Ethanol, Inc., Kinergy
Marketing, LLC, ReEnergy, LLC and the other parties named therein (1)

3.1 Certificate of Incorporation of the Registrant (1)

3.2 Bylaws of the Registrant (1)

4.1 Form of Registration Rights Agreement dated effective March 23, 2005
between Pacific Ethanol, Inc., a California corporation and the
investors who are parties thereto (1)

4.2 Form of Warrant dated March 23, 2005 issued by the Registrant to
subscribers to a private placement of securities by Pacific Ethanol,
Inc., a California corporation (1)

4.3 Form of Placement Warrant dated March 23, 2005 issued by the
Registrant to certain placement agents (1)

4.4 Form of Registration Rights Agreement of various dates between Pacific
Ethanol, Inc., a California corporation and the investors who are
parties thereto (7)

4.5 Form of Placement Warrant dated effective of various dates issued by
Pacific Ethanol, Inc., a California corporation, to certain placement
agents (7)

4.6 Form of Registration Rights Agreement dated effective May 14, 2004
between Pacific Ethanol, Inc., a California corporation and the
investors who are parties thereto (6)

II-4

EXHIBIT
NUMBER DESCRIPTION
------ -----------

4.7 Form of Placement Warrant dated effective May 14, 2004 issued by
Pacific Ethanol, Inc., a California corporation, to certain placement
agents (7)

4.8 Form of Registration Rights Agreement of various dates between Pacific
Ethanol, Inc., a California corporation and the investors who are
parties thereto (6)

4.9 Form of Warrant of various dates issued to subscribers to a private
placement of securities of Pacific Ethanol, Inc., a California
corporation (7)

4.10 Warrant dated March 23, 2005 issued by the Registrant to Jeffrey H.
Manternach (7)

4.11 Warrant dated June 15, 2001 issued to Rotom Enterprises, Inc. (9)

4.12 Warrant dated February 8, 2002 issued to Rotom Enterprises, Inc. (9)

4.13 Warrant dated June 15, 2001 issued to Colin Winthrop & Co., Inc. (9)

5.1 Opinion of Rutan & Tucker, LLP

10.1 Confidentiality, Non-Competition, Non-Solicitation and Consulting
Agreement dated March 23, 2005 between the Registrant and Barry Siegel
(1)

10.2 Confidentiality, Non-Competition, Non-Solicitation and Consulting
Agreement dated March 23, 2005 between the Registrant and Philip B.
Kart (1)

10.3 Form of Confidentiality, Non-Competition and Non-Solicitation
Agreement dated March 23, 2005 between the Registrant and each of Neil
M. Koehler, Tom Koehler, William L. Jones, Andrea Jones and Ryan W.
Turner (1)

10.4 Confidentiality, Non-Competition and Non-Solicitation Agreement dated
March 23, 2005 between the Registrant and Neil M. Koehler (1)

10.5 Form of Indemnification Agreement between the Registrant and each of
its Executive Officers and Directors (#)(1)

10.6 Executive Employment Agreement dated March 23, 2005 between the
Registrant and Neil M. Koehler (#)(1)

10.7 Executive Employment Agreement dated March 23, 2005 between the
Registrant and Ryan W. Turner (#)(1)

10.8 Stock Purchase Agreement and Assignment and Assumption Agreement dated
March 23, 2005 between the Registrant and Barry Siegel (1)

10.9 Letter Agreement dated March 23, 2005 between the Registrant and Neil
M. Koehler (1)

10.10 Assignment of Term Loan Agreement and Deed of Trust dated March 23,
2005 between the Registrant, Lyles Diversified, Inc. and the other
parties named therein (1)

10.11 Term Loan Agreement dated June 16, 2003 and Deed of Trust dated June
20, 2003 between Pacific Ethanol, Inc., a California corporation and
Lyles Diversified, Inc. (1)

10.12 Amendment to Loan Agreement dated July 29, 2004 between Pacific
Ethanol, Inc., a California corporation and Lyles Diversified, Inc.

10.13 Amendment #2 to Loan Agreement dated December 28, 2004 between Pacific
Ethanol, Inc., a California corporation and Lyles Diversified, Inc.

II-5

EXHIBIT
NUMBER DESCRIPTION
------ -----------

10.14 Ethanol Purchase and Marketing Agreement dated March 4, 2005 between
Kinergy Marketing, LLC and Phoenix Bio-Industries, LLC (2)

10.15 2004 Stock Option Plan (3)

10.16 Amended 1995 Stock Option Plan (4)

10.17 Warrant dated March 23, 2005 issued by the Registrant to Liviakis
Financial Communications, Inc. (1)

10.18 Executive Employment Agreement dated August 10, 2005 between the
Registrant and William G. Langley (#)(5)

10.19 Ethanol Marketing Agreement dated as of August 31, 2005 by and between
Kinergy Marketing, LLC and Front Range Energy, LLC (8)

10.20 Master Revolving Note dated September 24, 2004 of Kinergy Marketing,
LLC in favor of Comerica Bank (10)

10.21 Loan Revision/Extension Agreement dated October 4, 2005 and effective
as of June 20, 2005 between Kinergy Marketing, LLC and Comerica Bank
(10)

10.22 Letter Agreement dated as of October 4, 2005 between Kinergy
Marketing, LLC and Comerica Bank (10)

10.23 Guaranty dated October 4, 2005 by Pacific Ethanol, Inc. in favor of
Comerica Bank (10)

10.24 Security Agreement dated as of September 24, 2004 executed by Kinergy
Marketing, LLC in favor of Comerica Bank

10.25 Amended and Restated Phase 1 Design-Build Agreement dated November 2,
2005 by and between Pacific Ethanol Madera LLC and W. M. Lyles Co.
(11)

10.26 Phase 2 Design-Build Agreement dated November 2, 2005 by and between
Pacific Ethanol Madera LLC and W. M. Lyles Co. (11)

10.27 Letter Agreement dated November 2, 2005 by and between Pacific Ethanol
California, Inc. and W. M. Lyles Co. (11)

10.28 Continuing Guaranty dated as of November 3, 2005 by William L. Jones
in favor of W. M. Lyles Co. (11)

10.29 Continuing Guaranty dated as of November 3, 2005 by Neil M. Koehler in
favor of W. M. Lyles Co. (11)

10.30 Description of Non-Employee Director Compensation (12)

10.31 Purchase Agreement dated November 14, 2005 between Pacific Ethanol,
Inc. and Cascade Investment, L.L.C. (12)

10.32 Form of Certificate of Designations, Powers, Preferences and Rights of
the Series A Cumulative Redeemable Convertible Preferred Stock (12)

10.33 Form of Deposit Agreement between Pacific Ethanol, Inc. and the
Trustee named therein (12)

10.34 Form of Registration Rights and Stockholders Agreement between Pacific
Ethanol, Inc. and Cascade Investment, L.L.C. (12)

II-6

EXHIBIT
NUMBER DESCRIPTION
------ -----------

10.35 Voting Agreement dated November 14, 2005 by and among Pacific Ethanol,
Inc., Cascade Investment, L.L.C. and the Stockholders named therein
(12)

21.1 Subsidiaries of the Registrant (9)

23.1 Consent of Independent Registered Public Accounting Firm

23.2 Consent of Rutan & Tucker, LLP (contained in Exhibit 5.1)

24.1 Power of Attorney (7)

---------------
* To be filed by amendment.
(#) Management contract or compensatory plan, contract or arrangement
required to be filed as an exhibit.
(1) Filed as an exhibit to the Registrant's current report on Form 8-K for
March 23, 2005 filed with the Securities and Exchange Commission on March
29, 2005 and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's quarterly report on Form 10-QSB
for March 31, 2005 (File No. 0-21467) filed with the Securities and
Exchange Commission on May 23, 2005 and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's Registration Statement on Form
S-8 (Reg. No. 333-123538) filed with the Securities and Exchange
Commission on March 24, 2005 and incorporated herein by reference.
(4) Filed as an exhibit to the Registrant's annual report Form 10-KSB for
December 31, 2002 (File No. 0-21467) filed with the Securities and
Exchange Commission on March 31, 2003 and incorporated herein by
reference.
(5) Filed as an exhibit to the Registrant's current report on Form 8-K for
August 10, 2005 filed with the Securities and Exchange Commission on
August 16, 2005 and incorporated herein by reference.
(6) The Form of the Registration Rights Agreement was filed as Exhibit 4.4 to
the Registrant's Registration Statement on Form S-1 (Reg. No. 333-127714)
filed with the Securities and Exchange Commission on August 19, 2005 and
incorporated herein by reference.
(7) Filed as an exhibit to the Registrant's Registration Statement on Form
S-1 (Reg. No. 333-127714) filed with the Securities and Exchange
Commission on August 19, 2005 and incorporated herein by reference.
(8) Filed as an exhibit to the Registrant's current report on Form 8-K for
August 31, 2005 filed with the Securities and Exchange Commission on
September 7, 2005 and incorporated herein by reference.

(9) Filed as an exhibit to the Registrant's Amendment No. 1 to Registration
Statement on Form S-1 (Reg. No. 333-127714) filed with the Securities and
Exchange Commission on November 1, 2005 and incorporated herein by
reference.
(10) Filed as an exhibit to the Registrant's current report on Form 8-K for
November 1, 2005 filed with the Securities and Exchange Commission on
November 7, 2005 and incorporated herein by reference.
(11) Filed as an exhibit to the Registrant's current report on Form 8-K for
November 2, 2005 filed with the Securities and Exchange Commission on
November 8, 2005 and incorporated herein by reference.
(12) Filed as an exhibit to the Registrant's current report on Form 8-K for
November 10, 2005 filed with the Securities and Exchange Commission on
November 15, 2005 and incorporated herein by reference.

II-7

ITEM 17. UNDERTAKINGS

The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration fee" table in the effective registration statement; and

(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.

(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.

(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.

(2) For purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.

II-8

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14 hereof, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act, and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.

II-9

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement on Form S-1 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Fresno,
State of California on November 22, 2005.

PACIFIC ETHANOL, INC.

By: /s/ NEIL M. KOEHLER
-------------------------------------
Neil M. Koehler
President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.

NAME TITLE DATE
-------------------------------------------------------------------------------------------------------
* Chairman of the Board and Director November 22, 2005
-----------------------------------
William L. Jones

/s/ NEIL M. KOEHLER President, Chief Executive Officer and November 22, 2005
----------------------------------- Director (principal executive officer)
Neil M. Koehler

/s/ WILLIAM G. LANGLEY Chief Financial Officer (principal November 22, 2005
----------------------------------- accounting officer)
William G. Langley

* Director November 22, 2005
-----------------------------------
Frank P. Greinke

* Director November 22, 2005
-----------------------------------
Charles W. Bader

* Director November 22, 2005
-----------------------------------
John L. Prince

* Director November 22, 2005
-----------------------------------
Terry L. Stone

* Director November 22, 2005
-----------------------------------
Kenneth J. Friedman

*By: /s/ NEIL M. KOEHLER
----------------------------- November 22, 2005
Neil M. Koehler
Attorney-in-Fact

II-10

INDEX TO EXHIBITS

Exhibit
Number Description
------ -----------

5.1 Opinion of Rutan & Tucker, LLP

10.12 Amendment to Loan Agreement dated July 29, 2004 between Pacific
Ethanol, Inc., a California corporation and Lyles Diversified, Inc.

10.13 Amendment #2 to Loan Agreement dated December 28, 2004 between Pacific
Ethanol, Inc., a California corporation and Lyles Diversified, Inc.

10.24 Security Agreement dated as of September 24, 2004 executed by Kinergy
Marketing, LLC in favor of Comerica Bank

23.1 Consent of Independent Registered Public Accounting Firm