Edgar Filing: Pacific Ethanol, Inc.

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 19, 2005
REGISTRATION NO. 333-_________
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 2860 41-2170618
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)

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 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. [ ]

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) offering price(2) registration fee
------------------------------------------- --------------------- ---------------------- ---------------------- --------------------

Common stock, $.001 par value 11,503,454(3) $8.76 $100,770,257 $11,861
=========================================== ===================== ====================== ====================== ====================

(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 SmallCap Market
on August 17, 2005.
(3) Includes 2,927,587 shares of common stock issuable upon exercise of
warrants.

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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.

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SUBJECT TO COMPLETION, DATED AUGUST 19, 2005

PROSPECTUS

11,503,454 SHARES

PACIFIC ETHANOL, INC.

COMMON STOCK

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

This a public offering of 11,503,454 shares of our common stock. 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. Our common stock is quoted on the Nasdaq SmallCap
Market under the symbol "PEIX." On August 18, 2005, the closing sale price of
our common stock on the Nasdaq SmallCap Market was $8.78 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 5 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............................................................1
RISK FACTORS..................................................................5
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.............................16
USE OF PROCEEDS...............................................................16
DIVIDEND POLICY...............................................................16
PRICE RANGE OF COMMON STOCK...................................................17
CAPITALIZATION................................................................18
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA...............................19
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL DATA.....................20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.........................................23
BUSINESS......................................................................33
MANAGEMENT....................................................................47
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................57
PRINCIPAL STOCKHOLDERS........................................................63
SELLING SECURITY HOLDERS......................................................65
PLAN OF DISTRIBUTION..........................................................75
DESCRIPTION OF CAPITAL STOCK..................................................77
LEGAL MATTERS.................................................................79
EXPERTS.......................................................................79
WHERE YOU CAN FIND ADDITIONAL INFORMATION.....................................79
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. 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.

In March 2005, we completed a share exchange transaction, or the Share
Exchange Transaction, with the shareholders of Pacific Ethanol, Inc., a
California corporation, or PEI California, and the holders of the membership
interests of each of Kinergy Marketing, LLC, or Kinergy, and ReEnergy, LLC, or
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. We
have three principal wholly-owned subsidiaries: Kinergy, PEI California and
ReEnergy.

We are currently in the business of marketing ethanol in the Western
United States. Through third-party service providers, we provide transportation,
storage and delivery of ethanol. We sell ethanol primarily into 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 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.

In August 2005, we executed an agreement to acquire Phoenix
Bio-Industries, LLC, or PBI, a company that has completed construction of what
we believe is the first large-scale ethanol production facility in California.
The PBI facility has an annual ethanol production capacity of approximately 25
million gallons, is located in Goshen, California and is currently undergoing
initial start-up testing. The closing of the acquisition of PBI is contingent
upon certain events, including our obtaining all necessary funding to complete
the acquisition, which we currently estimate at approximately $40.0 million, the
satisfactory completion of our due diligence on PBI and on the ethanol
production facility and our ability to purchase all of the membership interests
of PBI. We expect that the closing of this acquisition, if it occurs, will occur
in October 2005. We cannot provide any assurances that the closing of our
acquisition of PBI will not be delayed or that the closing will occur at all.
See "Risk Factors."

We are constructing an ethanol production facility to begin, or in the
event the acquisition of PBI is consummated, to expand, 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, including through the acquisition of PBI as discussed
above, 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, California, 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 may build an ethanol production facility.

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 11,503,454 shares

Common stock to be outstanding after this offering 31,536,078 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 SmallCap Market symbol PEIX

The number of shares of common stock being offered by the selling
security holders includes 8,575,867 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 2,927,587
shares of common stock, and the immediate resale of all of those 11,503,454
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 28,608,491
shares outstanding as of August 18, 2005, and excludes the following:

o 133,000 shares of common stock reserved for issuance under our
Amended 1995 Incentive Stock Plan, of which options to purchase
133,000 shares were outstanding as of that date, at a weighted
average exercise price of $5.54 per share;
o 2,500,000 shares of common stock reserved for issuance under our
2004 Stock Option Plan, of which options to purchase 662,500
shares were outstanding as of that date, at a weighted average
exercise price of $8.05 per share;
o 201,251 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 six months ended June 30, 2005 and 2004 and the consolidated balance sheet
data as of June 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.

SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
------------------------------ ------------------------------
2005 2004 2004 2003
------------ ------------ ------------ ------------

CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales ...................................... $ 25,116,430 $ 16,003 $ 19,764 $ 1,016,594
Cost of goods sold ............................. 24,917,278 10,789 12,523 946,012
------------ ------------ ------------ ------------
Gross profit ................................... 199,152 5,214 7,241 70,582
Selling, general and administrative expenses ... 1,792,668 427,058 1,070,010 647,731
Non-cash compensation and consulting fees ...... 1,343,636 517,500 1,207,500 --
------------ ------------ ------------ ------------
Loss from operations ........................... (2,937,152) (939,344) (2,270,269) (577,149)
Total other expense ............................ (89,559) (266,944) (530,698) (279,930)
------------ ------------ ------------ ------------
Loss from operations before income taxes ....... (3,026,711) (1,206,288) (2,800,967) (857,079)
Provision for income taxes ..................... 4,800 2,400 (1,600) (1,600)
------------ ------------ ------------ ------------
Net loss ....................................... $ (3,031,511) $ (1,208,688) $ (2,802,567) $ (858,679)
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Basic loss per share ........................... $ (0.14) $ (0.10) $ (0.23) $ (0.09)
============ ============ ============ ============
Diluted loss per share ......................... $ (0.14) $ (0.10) $ (0.23) $ (0.09)
============ ============ ============ ============
Weighted-average shares outstanding, basic ..... 21,415,102 11,927,493 12,396,895 9,578,866
============ ============ ============ ============
Weighted-average shares outstanding, diluted ... 21,415,102 11,927,493 12,396,895 9,578,866
============ ============ ============ ============
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents ...................... $ 16,427,839 $ 138,048 $ 42 $ 249,084
Working capital (deficit) ...................... 15,734,748 311,096 (1,024,747) (357,576)
Total assets ................................... 41,537,605 7,786,802 7,179,263 6,559,634
Stockholders' equity ........................... 33,604,133 2,387,729 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 six months ended June 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 Corp., 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 Corp., 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 June 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 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.

SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2005 DECEMBER 31, 2004
------------------------------ ------------------------------
PRO FORMA PRO FORMA
PACIFIC PACIFIC ETHANOL PACIFIC PACIFIC ETHANOL
ETHANOL AND ACQUISITIONS ETHANOL AND ACQUISITIONS
------------ ------------ ------------ ------------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:

Net sales ...................................... $ 25,116,430 $ 48,721,682 $ 19,764 $ 82,810,168
Cost of goods sold ............................. 24,917,278 48,124,880 12,523 79,593,420
------------ ------------ ------------ ------------
Gross profit ................................... 199,512 596,802 7,241 3,216,748
Selling, general and administrative expenses ... 1,792,668 2,185,535 1,070,010 2,686,452
Non-cash compensation and consulting fees ...... 1,343,636 1,590,500 1,207,500 2,681,750
------------ ------------ ------------ ------------
Loss from operations ........................... (2,937,152) (3,179,233) (2,270,269) (2,151,454)
Total other expense ............................ (89,559) (88,943) (530,698) (535,535)
------------ ------------ ------------ ------------
Loss from operations before income taxes ....... (3,026,711) (3,268,176) (2,800,967) (2,686,989)
Provision for income taxes ..................... 4,800 5,600 (1,600) 2,400
------------ ------------ ------------ ------------
Net loss ....................................... $ (3,031,511) $ (3,273,776) $ (2,802,567) $ (2,689,389)
============ ============ ============ ============
Basic loss per share ........................... $ (0.14) $ (0.12) $ (0.23) $ (0.10)
============ ============ ============ ============
Diluted loss per share ......................... $ (0.14) $ (0.12) $ (0.23) $ (0.10)
============ ============ ============ ============
Weighted-average shares outstanding, basic ..... 21,415,102 27,799,611 12,396,895 26,486,309
============ ============ ============ ============
Weighted-average shares outstanding, diluted ... 21,415,102 27,799,611 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 June 30, 2005, we had an
accumulated deficit of approximately $6.7 million. For the six months ended June
30, 2005, we incurred a net loss of approximately $3.0 million. We expect to
incur losses for the foreseeable future and at least until the completion of our
planned ethanol production facility. Unless we are able to complete our
acquisition of PBI, we estimate that the earliest completion date of our ethanol
production facility in Madera County, 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 cannot assure you that we will
attain, sustain or increase profitability on a quarterly or annual basis in the
future. If we do not achieve, sustain or increase profitability, our business
will be adversely affected and 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. There can be no assurance that we
will be able 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 sale and profitability.

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

We have executed an agreement to acquire PBI, a company that has
constructed an ethanol production facility in Goshen, California. We plan to
fund a substantial majority of the acquisition costs of PBI and construction
costs of our planned ethanol production facility through the issuance of a
substantial amount of debt. We anticipate that we will need to raise
approximately $40.0 million and another $60.0 million in debt financing to
acquire PBI and to complete construction of our first ethanol production

facility, respectively. 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,
our business may be adversely affected, we may be forced to liquidate and you
could lose your entire investment.

FOLLOWING THE CLOSING OF OUR ANTICIPATED DEBT FINANCING, OUR LENDERS MAY
REQUIRE US TO ABIDE BY RESTRICTIVE LOAN COVENANTS THAT MAY HINDER OUR
ABILITY TO OPERATE AND REDUCE OUR PROFITABILITY.

We expect that following the closing of our anticipated debt financing,
the loan agreements governing our debt financing will contain a number of
restrictive affirmative and negative covenants. These covenants may limit our
ability to, among other things:

o incur additional indebtedness;
o make capital expenditures in excess of prescribed thresholds;
o pay dividends to our stockholders;
o make various investments;
o create liens on our assets;
o utilize the proceeds of asset sales; or
o merge or consolidate or dispose of all or substantially all of our
assets.

We also will likely be required to maintain specified financial ratios,
including minimum cash flow coverage, minimum working capital and minimum net
worth. We also may be required to utilize a portion of any excess cash flow
generated by operations to prepay our debt. A breach of any of these covenants
or requirements could result in a default under our debt agreements. If we
default, and if such default is not cured or waived, a lender could, among other
remedies, accelerate our debt and declare the debt immediately due and payable.
If this occurs, we may not be able to repay or borrow sufficient funds to
refinance our debt. Even if new financing is available, it may not be on terms
that are acceptable. Such an occurrence could cause us to cease building our
ethanol production facility, or if our facility is already constructed, such an
occurrence could cause us to cease or curtail operations. We cannot assure you
that our future operating results will be sufficient to achieve compliance with
such covenants and requirements, or in the event of a default, to remedy such
default.

GOVERNMENTAL REGULATIONS OR THE REPEAL OR MODIFICATION OF VARIOUS TAX
INCENTIVES FAVORING THE USE OF ETHANOL COULD ADVERSELY AFFECT OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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 Sate of California decreases, our
business, financial condition and results of operations would be materially and
adversely affected.

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 business and results of operations.

VIOLATIONS OF ENVIRONMENTAL REGULATIONS COULD SUBJECT US TO SEVERE
PENALTIES AND MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS, RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.

The production and sale of ethanol is subject to regulation by agencies
of the federal government, including, but not limited to, 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
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 business, results of operations and financial condition
could be materially and adversely affected.

WE RELY HEAVILY ON OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER, NEIL 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 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 significantly delay or prevent the achievement of our business
objectives. Consequently, the loss of Mr. Koehler could adversely affect our
business, financial condition and results of operations.

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.

The ethanol production and marketing industry is extremely competitive.
Many of our significant competitors in the ethanol production and marketing
industry have substantially greater production, financial, research and
development, personnel and marketing resources than we do. As a result, each of
these companies 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 and sales.

OUR FAILURE TO ATTRACT AND RETAIN KEY PERSONNEL COULD ADVERSELY AFFECT OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Our future success is dependent in part on our ability to attract and
retain certain key personnel. We currently have few employees and need to
attract additional skilled technical, clerical and managerial personnel in all
areas of our business to continue to grow. The competition for such individuals
in the growing ethanol production and marketing industry is intense. There can
be no assurance that we will be able to retain our existing personnel or attract
additional qualified personnel in the future. If we are unable to attract and
retain key personnel, our business, financial condition and results of
operations could be adversely affected.

OUR MANAGEMENT MAY FAIL TO SUCCESSFULLY INTEGRATE THE BUSINESS OF KINERGY
WITH THE PROPOSED ETHANOL PRODUCTION BUSINESS OF PBI OR PEI CALIFORNIA, OR
BOTH, WHICH COULD ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

Integrating the business of Kinergy with the proposed ethanol
production businesses of PBI and PEI California will be complex, time-consuming
and expensive, and our management may fail to successfully integrate these
businesses. Each of Kinergy, PBI and PEI California were previously operated
independently, each with its own business or proposed business, culture,
clients, employees and systems. Since March 2005, Kinergy and PEI California
have been be operated as a combined organization, utilizing common information
and communication systems, operating procedures, financial controls and human
resources practices, including benefits, training and professional development
programs. If the acquisition of PBI occurs, it will be consolidated with the
businesses of Kinergy and PEI California. We may experience substantial
difficulties, costs and delays relating to our efforts to integrate the business
of Kinergy and the proposed ethanol production business of PBI or PEI
California. These may include the diversion of management resources from our
core ethanol marketing business, the potential incompatibility of business
cultures and the costs and delays in implementing common systems and procedures.
Any one or all of these factors may cause increased operating costs or the loss
of key customers and employees, either of which could adversely affect our
business, financial condition and results of operations.

OUR FAILURE TO MANAGE OUR GROWTH EFFECTIVELY COULD IMPAIR OUR BUSINESS.

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 proposed acquisition of PBI and the
completion of construction of our planned ethanol production facility, will
require significant investments of capital and management's close attention. 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.

There can be no assurance that we will be able 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, our business, financial condition and results of
operations could be materially and adversely affected.

INSURANCE COVERAGE MAY BE INADEQUATE OR UNAVAILABLE TO PROTECT US FROM
LOSSES ASSOCIATED WITH OUR PLANS AND OPERATIONS, WHICH MAY ADVERSELY AFFECT
OUR BUSINESS AND FINANCIAL CONDITION.

Insurance coverage may be inadequate or unavailable to protect us from
losses associated with our plans and operations. Events may occur for which no
insurance is available or for which insurance is not available on terms that are
reasonably acceptable. In addition, events may occur for which our insurance
inadequately covers the associated losses. Losses from an uninsured or
underinsured event, such as, but not limited to, earthquakes, floods, war, riot,
acts of terrorism or other risks may be uninsured or underinsured and such a
loss may adversely affect our business and financial condition. In addition, we
operate in an industry that is subject to heavy environmental regulation and we
are undertaking to acquire PBI, a company that owns an existing ethanol
production facility, and complete construction of an additional ethanol
production facility, all of which subject us to substantial losses upon the
occurrence of certain events such as the discharge of a hazardous substance or a
catastrophic event such as an explosion or fire during or following the
acquisition of PBI or completion of construction of our ethanol production
facility. In the event of a loss, any failure to obtain and maintain insurance,
with adequate policy limits and/or self-retention limits, may adversely affect
our business and financial condition.

RISKS RELATED TO OUR COMMON STOCK

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 August 18, 2005, we had outstanding approximately 28.6 million
shares of our common stock. Approximately 25.2 million of these shares were
restricted under the Securities Act of 1933, including 9.3 million shares
beneficially owned, as a group, 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 expect to register for resale approximately 11.5 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 such shares of common stock. We cannot predict the
effect, if any, that future sales of shares of our common stock into the public
market will have on the market price of our common stock. However, 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 new products and processes 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 products 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 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 business, financial condition and results of operations and
also the price of our common stock.

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 MARGINS AND WHICH
COULD MATERIALLY AND ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.

Kinergy's purchases and sales of ethanol are not always matched with
sales and purchases of ethanol at established prices. As a standard business
practice, 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. As a standard business practice, 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's inventory of ethanol held for sale subjects us to the risk of a

decline in the price of ethanol. 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 results of operations.

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 SALES AND RESULTS OF OPERATIONS.

The vast majority of Kinergy's sales are generated from a small number
of customers. During the first six months of 2005, sales to Kinergy's two
largest customers that provided 10% or more of total sales represented
approximately 18% and 11%, 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, we cannot
assure you that, in any future period, Kinergy's sales generated from these
customers, individually or in the aggregate, will equal or exceed historical
levels. We also cannot assure you that, if sales to any of these customers cease
or decline, Kinergy will be able 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 net sales and results of operations.

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, KINERGY MAY BE UNABLE TO
SATISFY THE DEMANDS OF ITS CUSTOMERS AND OUR BUSINESS AND RESULTS OF
OPERATIONS 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 six months of 2005, Kinergy's four
largest suppliers that provided 10% or more of total purchases made represented
approximately 26%, 21%, 21% and 11%, respectively, representing an aggregate of
approximately 79%, 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. We cannot assure you that, if any of these
suppliers is unable or declines for any reason to continue to supply Kinergy
with ethanol, Kinergy will be able 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 any of these suppliers is unable or decides not to continue to
supply Kinergy with ethanol, Kinergy may be unable to satisfy the demands of its
customers and our business and results of operations will be adversely affected.

INTERRUPTIONS OR DELAYS IN KINERGY'S SUPPLY OF ETHANOL COULD CAUSE KINERGY
TO BE UNABLE TO SATISFY THE DEMANDS OF ITS CUSTOMERS AND ADVERSELY AFFECT
OUR BUSINESS AND RESULTS OF OPERATIONS.

Kinergy sources the ethanol that it sells primarily from suppliers
thousands of miles away 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. The quantity of ethanol in Kinergy's
inventory fluctuates and during periods of low inventory levels, Kinergy is more
vulnerable to the effects of interruptions and delays in its supply of ethanol.
Accordingly, interruptions or delays in Kinergy's supply of ethanol from the
Midwest could cause Kinergy to be unable to satisfy the demands of its customers
and adversely affect our business and results of operations.

RISKS RELATING TO THE BUSINESS OF PEI CALIFORNIA

THE ACQUISITION OF PBI AND THE COMPLETION OF CONSTRUCTION OF OUR PLANNED
ETHANOL PRODUCTION FACILITY WILL REQUIRE SIGNIFICANT ADDITIONAL FUNDING,
WHICH WE EXPECT TO RAISE THROUGH DEBT FINANCING. WE CANNOT ASSURE YOU THAT
WE WILL BE SUCCESSFUL IN RAISING ADEQUATE CAPITAL.

We anticipate that we will need to raise approximately $40.0 million
and an additional $60.0 million in debt financing to complete the acquisition of
PBI and complete construction of our first ethanol production facility in Madera
County, respectively. We have no contracts with or binding commitments from any
bank, lender or financial institution for this debt financing. We cannot assure
you that any funding from one or more lenders will be obtained, or if it 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 an ethanol production facility.

NEITHER PBI NOR PEI CALIFORNIA HAS CONDUCTED ANY SIGNIFICANT BUSINESS
OPERATIONS AND HAVE BEEN UNPROFITABLE TO DATE. IF EITHER PBI OR PEI
CALIFORNIA FAILS TO COMMENCE SIGNIFICANT BUSINESS OPERATIONS, IT WILL BE
UNSUCCESSFUL, WILL FAIL TO CONTRIBUTE POSITIVELY TO OUR PROFITABILITY AND
WILL HAVE AN ADVERSE EFFECT ON OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.

Neither PBI nor PEI California has conducted any significant business
operations and have been unprofitable to date. Accordingly, there is no prior
operating history by which to evaluate the likelihood of PBI's or PEI
California's success or its contribution to our profitability. We cannot assure
you that our acquisition of PBI will ever be consummated or, if consummated,
that PBI will ever commence significant business operations or ever be
successful or contribute positively to our profitability. We also cannot assure
you that PEI California will ever complete construction of an ethanol production
facility and commence significant operations or, if PEI California does complete
the construction of an ethanol production facility, that PEI California will
ever be successful or contribute positively to our profitability. If PBI or PEI
California fails to commence significant business operations, it will be
unsuccessful and will fail to contribute positively to our profitability, which
will have an adverse effect on our financial condition and results of
operations.

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

The market price of ethanol is somewhat dependent 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
three months from January 2005 through March 2005 and has reversed this decline
and increased by approximately 25% from its 2004 average price per gallon in
only four months from April 2005 through July 2005. If PEI California fails to
price its ethanol consistently in a manner that is profitable, our business,
financial condition and results of operations will be adversely affected.

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. We cannot assure you that
there will be any material or significant increases in the demand for ethanol
commensurate with increasing supplies of ethanol. Accordingly, 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 may
adversely affect our business, financial condition and results of operations.

THE CONSTRUCTION AND OPERATION OF OUR PLANNED ETHANOL PRODUCTION FACILITY,
AND, IN THE EVENT WE CONSUMMATE THE ACQUISITION OF PBI, THE OPERATION OF
PBI'S ETHANOL PRODUCTION FACILITY, 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 facility. In addition, PBI will
be subject to these regulations in connection with the operation of its ethanol
production facility. 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 facility are likely to
increase; in addition, the facility may not be fully constructed at all. It is
also likely that operations at the facility 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, which could have a material and adverse effect on
our business and results of operations.

VARIOUS RISKS ASSOCIATED WITH THE CONSTRUCTION OF OUR PLANNED ETHANOL
PRODUCTION FACILITY AND, IN THE EVENT WE CONSUMMATE THE ACQUISITION OF PBI,
THE OPERATION OF PBI'S ETHANOL PRODUCTION FACILITY, MAY ADVERSELY AFFECT
OUR BUSINESS AND FINANCIAL CONDITION.

We cannot assure you that delays in the construction of our planned
ethanol production facility or defects in materials and/or workmanship will not
occur. Any defects could delay the commencement of operations of the facility,
or, if such defects are discovered after operations have commenced, could halt
or discontinue operation of the facility indefinitely. These risks also apply to
the operation of PBI's ethanol production facility. 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 business and financial condition.

There can be no assurance that PEI California will not encounter
hazardous conditions at or near the Madera County site. PEI California may
encounter conditions at or near the site that may delay construction of the
facility. If PEI California encounters a hazardous condition at or near the
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 the facility and may require
significant expenditure of resources to correct the condition. In addition,
W. M. Lyles Co., the company we have selected to construct our Madera County,
California 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 business and financial condition
may be adversely affected.

We have based our estimated capital resource needs on a design for the
planned ethanol production facility and related co-generation facility that we
estimate will cost approximately $60.0 million. The estimated cost of the
facility is based on preliminary discussions and estimates, and we cannot assure
you that the final construction cost of the facility will not be significantly
higher. Any significant increase in the final construction cost of the facility
may adversely affect our business, financial condition and results of
operations.

PEI CALIFORNIA'S DEPENDENCE ON AND AGREEMENTS WITH W. M. LYLES CO. FOR THE
CONSTRUCTION OF OUR PLANNED ETHANOL PRODUCTION FACILITY COULD ADVERSELY
AFFECT OUR BUSINESS AND FINANCIAL CONDITION.

PEI California will be highly dependent upon W. M. Lyles Co. to design
and build our planned ethanol production facility in Madera County, California.
PEI California has 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 PEI California. These
agreements also include a provision that requires PEI California 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 PEI California terminates it in favor of another contractor.
Consequently, if PEI California terminates these agreements, the requirement
that it pay the termination fee and costs could adversely affect our business
and financial condition. 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 planned facility. As a
result, PEI California's ability to commence production of and sell ethanol
would be delayed, which would adversely affect our business, financial condition
and results of operations.

THE RAW MATERIALS AND ENERGY NECESSARY TO PRODUCE ETHANOL MAY BE
UNAVAILABLE OR MAY INCREASE IN PRICE, ADVERSELY AFFECTING OUR BUSINESS AND
RESULTS OF OPERATIONS.

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 planned 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. In
addition, we estimate that PBI's ethanol production facility will require
approximately 9.0 million bushels or more of corn each year and also will
require 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. We cannot assure you that local water, electricity and gas
utilities will be able to reliably supply the water, electricity and natural gas
that our planned ethanol production facility will need or will 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 or PBI'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 or PBI paying
higher prices than its competitors. In addition, PEI California and PBI 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 financial
condition and results of operation will be significantly affected by the prices
and supplies of raw materials and energy.

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.

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 SmallCap Market under
the symbol "PEIX" since March 24, 2005. 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 (through August 18, 2005)................... 9.99 7.78

As of August 18, 2005, we had 28,608,491 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 August 18,
2005, the closing sale price of our common stock on the Nasdaq SmallCap Market
was $8.78 per share.

CAPITALIZATION

The following table sets forth our capitalization as of June 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.

JUNE 30, 2005
------------

Long-term debt, less current portion ...................... $ 2,887,947
------------
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; 28,608,491 shares
issued and outstanding ............................... 28,608
Additional paid-in capital ............................. 42,119,996
Unvested consulting expense ............................ (1,851,114)
Due from stockholders .................................. (600)
Accumulated deficit .................................... (6,692,757)
------------
Total stockholders' equity ........................... 33,604,133
------------
Total capitalization ............................... $ 36,492,080
============

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 six months June 30, 2005 and 2004 and the consolidated balance sheet data as
of June 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.

SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
------------------------------ ------------------------------
2005 2004 2004 2003
------------ ------------ ------------ ------------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:

Net sales ...................................... $ 25,116,430 $ 16,003 $ 19,764 $ 1,016,594
Cost of goods sold ............................. 24,917,278 10,789 12,523 946,012
------------ ------------ ------------ ------------
Gross profit ................................... 199,152 5,214 7,241 70,582
Selling, general and administrative expenses ... 1,792,668 427,058 1,070,010 647,731

Non-cash compensation for consulting fees ...... 1,343,636 517,500 1,207,500 --
------------ ------------ ------------ ------------
Loss from operations ........................... (2,937,152) (939,344) (2,270,269) (577,149)
Total other expense ............................ (89,559) (266,944) (530,698) (279,930)
------------ ------------ ------------ ------------
Loss from operations before income taxes ....... (3,026,711) (1,206,288) (2,800,967) (857,079)
Provision for income taxes ..................... 4,800 2,400 (1,600) (1,600)
------------ ------------ ------------ ------------
Net loss ....................................... $ (3,031,511) $ (1,208,688) $ (2,802,567) $ (858,679)
============ ============ ============ ============
Basic loss per share ........................... $ (0.14) $ (0.10) $ (0.23) $ (0.09)
============ ============ ============ ============
Diluted loss per share ......................... $ (0.14) $ (0.10) $ (0.23) $ (0.09)
============ ============ ============ ============
Weighted-average shares outstanding, basic ..... 21,415,102 11,927,493 12,396,895 9,578,866
============ ============ ============ ============
Weighted-average shares outstanding, diluted ... 21,415,102 11,927,493 12,396,895 9,578,866
============ ============ ============ ============
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents ...................... $ 16,427,839 $ 138,048 $ 42 $ 249,084
Working capital (deficit) ...................... 15,734,748 311,096 (1,024,747) (357,576)
Total assets ................................... 41,537,605 7,786,802 7,179,263 6,559,634
Stockholders' equity ........................... 33,604,133 2,387,729 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
Pacific Ethanol, Inc., a California corporation, or PEI California, and the
holders of the membership interests of each of Kinergy Marketing, LLC and
ReEnergy, LLC, 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 Marketing, LLC and ReEnergy, LLC. 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 six months ended June 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.

The financial information for Pacific Ethanol contained on the Pro
Forma Condensed Consolidated Statements of Operations for the Six Months ended
June 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 June 30,
2005 and financial information for PEI California for the period beginning on
January 1, 2005 and ending on June 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)
SIX MONTHS ENDED JUNE 30, 2005

PACIFIC PRO FORMA PRO FORMA
REENERGY KINERGY ETHANOL ADJUSTMENTS(1) COMBINED
------------ ------------ ------------ ------------ ------------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:

Net sales ...................................... $ -- $ 23,605,252 $ 25,116,430 $ -- $ 48,721,682
Cost of goods sold ............................. -- 23,207,602 24,917,278 -- 48,124,880
------------ ------------ ------------ ------------ ------------
Gross profit ................................... -- 397,650 199,152 -- 596,802
Selling, general and administrative expenses ... 346 72,240 1,792,668 320,281 2,185,535
Non-cash compensation and consulting fees ...... -- -- 1,343,636 246,864 1,590,500
------------ ------------ ------------ ------------ ------------
Net income (loss) from operations .............. (346) 325,410 (2,937,152) (567,145) (3,179,233)
Total other income (expense) ................... -- 616 (89,559) -- (88,943)
------------ ------------ ------------ ------------ ------------
Net income (loss) from operations before
income taxes ................................ (346) 326,026 (3,026,711) (567,145) (3,268,176)
Provision for income taxes ..................... 800 -- 4,800 -- 5,600
------------ ------------ ------------ ------------ ------------
Net income (loss) .............................. $ (1,146) $ 326,026 $ (3,031,511) $ (567,145) $ (3,273,776)
============ ============ ============ ============ ============
Basic loss per share (2) ....................... $ (0.22) $ (0.12)
============ ============
Diluted loss per share (2) ..................... $ (0.22) $ (0.12)
============ ============
Weighted-average shares outstanding, basic ..... 13,710,197 27,799,611
============ ============
Weighted-average shares outstanding, diluted ... 13,710,197 27,799,611
============ ============
----------
(1) For an explanation of the pro forma adjustments see Notes to Unaudited
Pro Forma Combined Consolidated Statements of Operations for the Six
Months Ended June 30, 2005 on page F-56.
(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(1) COMBINED
---------- ---------- ----------- ---------- -----------
Loss per share .................................. $ -- $ -- $ (0.22) $ -- $ (0.12)
---------- ---------- ----------- ---------- -----------
Numerator:
Net income (loss) attributable to
common stockholders ........................ (1,146) 326,026 (3,031,511) (567,145) (3,273,776)
---------- ---------- ----------- ---------- -----------
Denominator:
Weighted average number of common
shares outstanding during the period,
basic ...................................... 13,710,197 7,089,414 20,799,611
Additional weighted average common
shares if private placement occurred at
January 1, 2005 (considered necessary to
complete acquisitions) ..................... 7,000,000 7,000,000
----------- ---------- -----------
Adjusted weighted average shares ................ 13,710,197 14,089,414 27,799,611
----------- ---------- -----------
Basic loss per share ............................ $ (0.22) $ (0.04) $ (0.12)
=========== ========== ===========
Diluted loss per share .......................... $ (0.22) $ (0.04) $ (0.12)
=========== ========== ===========
----------
(1) For an explanation of the pro forma adjustments see Notes to Unaudited
Pro Forma Combined Consolidated Statements of Operations for the Six
Months Ended June 30, 2005 on page F-56.

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(1) COMBINED
-------- ------------ ------------ ----------- ------------
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
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) (2,805,250) (2,151,454)
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) (2,805,250) (2,686,989)
Provision for income taxes ..................... (800) -- 1,600 -- 2,400
-------- ------------ ------------ ----------- ------------
Net income (loss) .............................. $(10,654) $ 2,929,082 $ (2,802,567) $(2,805,250) $ (2,689,389)
======== ============ ============ =========== ============
Basic loss per share (2) ....................... $ (0.23) $ (0.10)
============ ============
Diluted loss per share (2) ..................... $ (0.23) $ (0.10)
============ ============
Weighted-average shares outstanding, basic ..... 12,396,895 26,486,309
============ ============
Weighted-average shares outstanding, 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-58.
(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(1) COMBINED
----------- ----------- ----------- ----------- -----------
Loss per share ................................ $ -- $ -- $ (0.23) $ -- $ (0.10)
----------- ----------- ----------- ----------- -----------
Numerator:
Net income (loss) attributable to
common stockholders ........................ (10,654) 2,929,082 (2,802,567) (2,805,250) (2,689,389)
----------- ----------- ----------- ----------- -----------
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 loss per share .......................... $ (0.23) $ (0.20) $ (0.10)
=========== =========== ===========
Diluted loss per share ........................ $ (0.23) $ (0.20) $ (0.10)
=========== =========== ===========
----------
(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-58.

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 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 our business strategy for expanding, maintaining or contracting
our presence in this market;
o our ability to efficiently and effectively integrate and operate
the businesses of our newly-acquired subsidiaries, Pacific
Ethanol, Inc., a California corporation that was organized in 2003
("PEI California"), Kinergy Marketing, LLC, an Oregon limited
liability company that was organized in 2000 ("Kinergy") and
ReEnergy, LLC, a California limited liability company that was
organized in 2001 ("ReEnergy");
o our ability to consummate the purchase of the membership interests
of Phoenix Bio-Industries, LLC;
o our ability to obtain the necessary financing to complete
construction of an ethanol plant in Madera County;
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 set
forth below 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.

satisfactory completion of our due diligence on PBI and on the ethanol
production facility and our ability to purchase all of the membership interests
of PBI. We expect that the closing of this acquisition, if it occurs, will occur
in October 2005. We cannot provide any assurances that the closing of our
acquisition of PBI will not be delayed or that the closing will occur at all.
See "Risk Factors."

Unless we are able to complete our acquisition of PBI, we expect that
until we complete the construction of our planned 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
agreement with PBI which provides that we will market and sell PBI's entire
ethanol production from its plant located in Goshen, California. The term of
this agreement is two years from the date that ethanol is first available for
marketing from PBI's plant. This agreement will remain in effect if we are not
successful in acquiring PBI.

Historically, Kinergy's gross profit as a percentage of sales has
averaged between 2.0% and 4.4%, primarily due to increases in the value of the
inventory we held for sale during periods in which ethanol prices generally
increased. However, in light of recent overall volatility in ethanol prices, we
anticipate that until we either complete the acquisition of PBI and/or complete
our facility and commence the business of ethanol production thereby obtaining
the benefits of higher profit margins associated with production activities as
compared to marketing and distribution activities, our gross profit as a
percentage of sales will be close to 1.0%. This is also true in light of our
agreement with PBI, which we expect will result in obtaining a 1.0% gross profit
on the sale of PBI's ethanol. We believe that this level of gross profit is more
typical of the ethanol marketing industry.

The market price of ethanol is volatile and subject to significant
fluctuations, which may cause our results of operations to fluctuate
significantly. The market price of ethanol is somewhat dependent on the price of
gasoline, which is in turn dependent on the price of petroleum. We cannot
predict the future price of gasoline or oil and we may realize 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 three months from January 2005 through March
2005 and has reversed this decline and increased to approximately 25% above its
2004 average price per gallon in only four months from April 2005 through July
2005. If we fail to price our ethanol consistently in a manner that is
profitable, our business, financial condition and results of operations will be
adversely affected.

SHARE EXCHANGE TRANSACTION

On March 23, 2005, we completed a share exchange transaction, or 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 Corp., a New York corporation, or 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 wholly-owned subsidiaries: Kinergy, PEI
California and ReEnergy.

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 six months ended June 30, 2004 consist
of the operations of PEI California only. We have consolidated the results of
Kinergy and ReEnergy beginning March 23, 3005, the date of the Share Exchange
Transaction. Accordingly, our results of operations for the six months ended
June 30, 2005 consist of the operations of PEI California for the entire six
month period and the operations of Kinergy and ReEnergy from March 23, 2005
through June 30, 2005.

PEI California has, to date, not conducted any significant business
operations other than the acquisition of real property located in Madera County,
California, on which we are construction 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 may 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.
Unless we are able to complete our acquisition of PBI, we expect that until we
complete construction of our planned 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:

Current assets............................... $ 7,014,196
Property, plant and equipment................ 6,224
Intangibles, including goodwill.............. 11,788,000
------------
Total assets acquired..................... 18,808,420
Current liabilities.......................... 4,253,177
Other liabilities............................ 83,017
------------
Total liabilities assumed................. 4,336,194
------------
Net assets acquired.......................... $ 14,472,226
============
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
among Kinergy's and ReEnergy's businesses 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.

Six Months
Ended June 30,
----------------------------------
2005 2004
-------------- --------------
Net sales $ 48,721,682 $ 37,842,788
============== ==============
Net loss $ (3,273,776) $ (1,374,834)
============== ==============
Loss per share of common stock
Basic $ (0.12) $ (0.05)
============== ==============
Diluted $ (0.12) $ (0.05)
============== ==============

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 derive revenues 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. We recognize revenue upon delivery of
ethanol to a customer's designated ethanol tank. Shipments are made to customers
directly from suppliers and from our inventory. We ship ethanol 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 we ship by truck and deliver the product the same day as shipment.

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 as well as 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 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. 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
and ReEnergy acquisitions therefore totaled $2,952,000.

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.

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.

SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO SIX MONTHS ENDED JUNE 30, 2004

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

Net sales................................. $25,116,430 $ 16,003 $ 25,100,427 156,848.3% 100.0% 100.0%
Cost of sales............................. 24,917,278 10,789 (24,906,489) (230,850.8) 99.2 67.4
---------- ----------- ------------ ---------- ----- --------
Gross profit.............................. 199,152 5,214 193,938 3,719.6 0.8 32.6
Selling, general and administrative
expenses................................ 1,792,668 427,058 (1,365,610) (319.8) 7.1 2,668.6
Non-cash compensation and consulting fees. 1,343,636 517,500 (826,136) (159.6) 5.4 3,233.8
---------- ----------- ------------ ---------- ----- --------
Loss from operations ..................... (2,937,152) (939,344) (1,997,808) (212.7) (11.7) (5,869.8)
Total other expense....................... (89,559) (266,944) 177,385 66.5 0.4 1,668.1
---------- ----------- ------------ ---------- ----- --------
Loss from operations before income taxes.. (3,026,711) (1,206,288) (1,820,423) 150.9 (12.1) (7,537.9)
Provision for income taxes ............... 4,800 2,400 (2,400) (100.0) -- 15.0
---------- ----------- ------------ ---------- ----- --------
Net loss.................................. $(3,031,511) $(1,208,688) $ (1,822,823) (150.8)% (12.1)% (7,552.9)%
========== =========== ============ ========== ===== ========

NET SALES. Net sales for the six months ended June 30, 2005 increased
by $25,110,427 to $25,116,430 as compared to $16,003 for the six months ended
June 30, 2004. Sales attributable to the acquisition of Kinergy on March 23,
2005 contributed $25,100,522 of this increase. Without the acquisition of
Kinergy, our net sales would have decreased by $95 to $15,908.

GROSS PROFIT. Gross profit for the six months ended June 30, 2005
increased by $193,938 to $199,152 as compared to $5,214 for the six months ended
June 30, 2004, primarily due to the acquisition of Kinergy on March 23, 2005.
Gross profit as a percentage of net sales decreased to 0.8% for the six months
ended June 30, 2005 as compared to 33% for the six months ended June 30, 2004.
This difference is attributable to the acquisition of Kinergy on March 23, 2005.

Historically, Kinergy's gross profit as a percentage of sales has
averaged between 2.0% and 4.4%, primarily due to increases in the value of the
inventory held for sale during periods in which ethanol prices generally
increased. However, in light of recent overall volatility in ethanol prices, we
anticipate that until we either complete the acquisition of PBI and/or complete
our facility and commence the business of ethanol production thereby obtaining
the benefits of higher profit margins associated with production activities as
compared to marketing and distribution activities, our gross profit as a
percentage of sales will be closer to 1.0%. This is also true in light of our
agreement with PBI, which we expect will result in obtaining a 1.0% gross profit
on the sale of PBI's ethanol. We believe that this level of gross profit is more
typical of the ethanol marketing industry.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the six months ended June 30, 2005 increased by
$1,365,610 (319.8%) to $1,792,668 as compared to $427,058 for the six months
ended June 30, 2004. This increase was primarily due to additional headcount,
legal, accounting and insurance 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 we issued in our private offering in March
2005, increased employee costs associated with planned staffing increases,
increased sales and marketing expenses, increased activities related to the
construction of our Madera County, California ethanol production facility and
increased activity in searching for and analyzing potential acquisitions.

NON-CASH COMPENSATION AND CONSULTING FEES. Non-cash compensation and
consulting fees for the six months ended June 30, 2005 increased by $826,136
(166%) to $1,343,636 as compared to $517,500 for the six months ended June 30,
2004. $460,386 of these fees related to non-cash consulting fees for warrants,
$651,000 related to non-cash compensation from stock grants in connection with
the hiring of two employees and 232,250 related to a stock grant that vested
upon closing of the share exchange transaction, March 23, 2005. We expect to
incur non-cash consulting fee expense in the amount of $89,125 per month for the
remainder of the two-year term ending on March 23, 2007.

TOTAL OTHER EXPENSE. Total other expense decreased by $177,385 to
$(89,559) for the six months ended June 30, 2005 as compared to ($266,944) for
the six months ended June 30, 2004, primarily due to interest income on cash in
seven day investment accounts and decrease in expense related to construction
payables.

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 primarily from the decrease in sales of grain
inventory acquired in the purchase of a grain facility.

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 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 headcount,
legal, accounting and insurance expenses. 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 $1,027,500
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 six months ended June 30, 2005, we funded our operations
primarily from the approximately $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 June 30, 2005, we had working capital of $15,734,748,
which represented a $16,759,495 increase from negative working capital of
$1,024,747 at December 31, 2004, primarily due to the proceeds from the private
offering. As of June 30, 2005 and December 31, 2004, we had accumulated deficits
of $6,692,757 and $3,661,246, respectively, and cash and cash equivalents of
$16,427,839 and $42, respectively.

Accounts receivable increased $2,103,736 during the six months ended
June 30, 2005 from $8,464 as of December 31, 2004 to $2,112,200 as of June 30,
2005. Sales attributable to the acquisition of Kinergy contributed substantially
all of this increase.

Inventory balances increased $1,111,960 during the six months ended
June 30, 2005, from $0 as of December 31, 2004 to $1,111,960 as of June 30, 2005
because of the acquisition of Kinergy. Inventory represented 2.7% of our total
assets as of June 30, 2005.

Cash used in our operating activities totaled $695,259 for the six
months ended June 30, 2005 as compared to cash used by operating activities of
$270,529 for the six months ended June 30, 2004. This $424,730 increase in cash
used in operating activities primarily resulted from an increase in inventories
and pre-paid expenses.

Cash used in our investing activities totaled $2,156,696 for the six
months ended June 30, 2005 as compared to $556,846 of cash used for the six
months ended June 30, 2004. Included in the results for the six months ended
June 30, 2005 are net cash of $457,808 used to acquire Kinergy and ReEnergy, net
cash of $2,845,742 used to purchase property, plant and equipment and net cash
of $1,146,854 that we acquired in connection with the acquisition of Accessity,
Kinergy and ReEnergy.

Cash provided by our financing activities totaled $19,279,752 for the
six months ended June 30, 2005 as compared to $716,339 for the six months ended
June 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 described
below.

On March 23, 2005, we 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. We 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 $270,658 through June 30, 2005 and continue to be
incurred in connection with various securities filings and the resale
registration statement described below.

We are 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, 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 225
days following March 23, 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 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.

We have used a portion of the net proceeds from the March 2005 private
placement to fund our working capital requirements and begin site preparation at
the Madera County, California facility. We expect to use the remainder of the
net proceeds to fund our working capital requirements over the next 12 months
and to continue construction of our first ethanol production facility in Madera
County, California. We expect that the proceeds used to continue construction
will be used primarily for site preparation, acquisition of equipment and
engineering services. Significant additional funding is required to complete
construction of our first ethanol facility in Madera County, California. No
assurances can me be made that we will be successful in obtaining these
additional funds. See "Risk Factors."

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
the 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.

In March 2005, we completed a share exchange transaction, or the Share
Exchange Transaction, with the shareholders of Pacific Ethanol, Inc., a
California corporation, or PEI California, and the holders of the membership
interests of each of Kinergy Marketing, LLC, or Kinergy, and ReEnergy, LLC, or
ReEnergy. This transaction has been accounted for as a reverse acquisition
whereby PEI California is the accounting acquiror. 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, our predecessor, Accessity Corp., a New York corporation, or
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.

facilities advisable. PEI California has, to date, not conducted any significant
business operations other than the acquisition of real property located in
Madera County, California, 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 may build an 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
California Department of Motor Vehicles, approximately 28 million motor vehicles
were registered in California 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. According to the Renewable Fuels
Association, in its ETHANOL INDUSTRY OUTLOOK 2004, the ethanol market in
California was expected to exceed 950 million gallons, or more than 25% of the
national market. However, also according to the Renewable Fuels Association, in
its ETHANOL INDUSTRY OUTLOOK 2004, California has only two small ethanol plants
with a combined production capacity of less than 10 million gallons per year,
leaving California with ethanol production levels substantially below the demand
for ethanol in California. The PBI ethanol production facility, with an
estimated capacity of approximately 25 million gallons per year, is anticipated
to commence production of ethanol in October 2005. 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.

According to material published by the Renewable Fuels Association,
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 through Kinergy, we could market
and sell locally all of the 25 million gallons expected to be produced at PBI's
Goshen, California ethanol production facility as well as all or substantially
all of the 35 million gallons of ethanol expected to be produced at our planned
Madera County, California ethanol production facility.

According to BBI International, in an Ethanol Feasibility Study
prepared in March 2003 for ReEnergy, over the course of a decade, prices for
ethanol delivered by rail car into California have ranged between $.90 and $1.75
per gallon, averaging approximately $1.27 per gallon. Of the many factors
influencing the price of ethanol, we believe that the price of gasoline has the
largest influence. 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.

Ethanol represents only up to 3% of the total annual gasoline supply in
the United States, therefore we believe that the ethanol industry has
substantial room to grow to reach what we believe is an achievable level of 10%
of the total annual gasoline supply in the United States. In California alone,
an increase in the demand for ethanol to 10% of the total annual gasoline supply
would result in annual demand for approximately 650 million additional gallons
of ethanol, which represents an increase in demand on a national basis of
approximately 16%. Although the short-term supply of ethanol has recently
increased at a faster rate than the increase in demand over the same period, we
believe that in the long-term supply and demand for ethanol will be more
balanced.

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 4.0 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,
as in the case of the PBI ethanol production facility in Goshen,
California, represents an opportunity to more quickly or
successfully meet our business goals, we intend to undertake to
consummate these acquisitions.

o COMPLETE CONSTRUCTION OF AN 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 our acquisition of PBI, which has
constructed a 25 million gallon per year ethanol plan in Goshen,
California, if it occurs, or the completion of construction of our
35 million gallon per year ethanol plant in Madera County,
California, 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 six months of 2005, we purchased and resold an
aggregate of approximately 32 million gallons of fuel grade ethanol to
approximately 23 customers. Sales to Kinergy's three largest customers
represented in the aggregate approximately 35% of our net sales in the first six
months of 2005. Sales to each of our other customers did not represent more than
approximately 9% of our net sales in the first six months of 2005.

During 2004, we purchased and resold an aggregate of approximately 52.5
million gallons of fuel grade ethanol to approximately 25 customers. Sales to
Kinergy's five largest customers represented in the aggregate approximately 58%
of Kinergy's total revenues in 2004. Sales to each of our other customers did
not represent more than approximately 5% of our revenue in 2004.

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.

We typically match ethanol purchase and sale contracts of like
quantities and delivery period, which ordinarily range from one to twelve
months. From time to time, we attempt to take advantage of what we perceive to
be favorable industry trends and maintain net long or short ethanol positions.
This practice does subject us to the risk of prices moving in unanticipated
directions, which may result in losses, but also enables us to benefit from
above normal gross profit margins. Historically, our gross profit as a
percentage of sales has averaged between 2.0% to 4.4%, primarily due to
increases in the values of our inventory we held for sale during periods in
which ethanol prices generally increased. However, we anticipate that until we
complete our facility and commence the business of ethanol production thereby
obtaining the benefits of higher profit margins associated with production
activities as compared to marketing and distribution activities, our gross
profit as a percentage of sales will be approximately 1.0%. This is especially
true in light of our recent entry into a marketing agreement with PBI to market
and sell, in the event our pending acquisition of PBI is not consummated, all of
PBI's ethanol production from its plant located in Goshen, California. We expect
initial production to be approximately 25 million gallons per year once PBI
commences ethanol production, which is anticipated to occur during the third
quarter of 2005. We also expect, in the event our pending acquisition of PBI is
not consummated, to obtain a 1.0% gross profit on the sale of PBI's ethanol, a
profit level which we believe to be typical of the ethanol marketing industry.

We expect to begin to market and sell ethanol we produce following our
acquisition of PBI and the commencement of operations at PBI's Goshen,
California facility, or in the event that our acquisition of PBI is not
consummated, upon completion of construction of our ethanol production facility
in Madera County, California. We believe that most or all of the ethanol
produced at PBI's facility and upon completion of construction of our Madera
County, California facility can be sold into local markets. We will 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 have executed an agreement to acquire PBI, a company that has
completed construction of what we believe is the first large-scale ethanol
production facility in California with an annual ethanol production capacity of
approximately 25 million gallons. In addition, 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 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

If the acquisition of PBI is consummated, we expect to market and sell
ethanol produced at PBI's ethanol production facility through Kinergy. If the
acquisition of PBI is not consummated, 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. Upon completion of our ethanol plant in
Madera County, we also 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 and PBI's Goshen
site. The greater Fresno area is experiencing rapid population growth. The
Fresno/Clovis metro area population is nearly 700,000. 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 PBI's Goshen, California facility and at our planned 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 planned production site in Madera County and within the same
approximate distance of our potential sites in Visalia and Goshen, California,
for a combined total, excluding any overlap, of over 750,000 dairy cows. We
expect that our planned ethanol production facility in Madera County as well as
our potential sites in Visalia and Goshen, California will each 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 also expect PBI's Goshen facility to be highly-efficient and have
capacities commensurate with that of a modern ethanol production facility.

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 has entered into a construction agreement with W.M.
Lyles Co. for the construction of an ethanol plant at our Madera County site and
a potential second ethanol plant, currently considered for location in Visalia,
California. The construction agreement provides that W.M. Lyles Co. will provide
pricing choices in the construction of the plant. The first option is a lump sum
pricing option in which W.M. Lyles Co. sets a fixed price for the construction
of the plant. The second pricing option is a guaranteed maximum price, or GMP,
contract that sets a cap on total construction costs while providing for shared
savings if the actual cost falls below the GMP price. W.M. Lyles Co. provided us
with a lump sum price bid of $51.8 million and a GMP price of $52.8 million in
January 2005, that expired on April 1, 2005. We expect to receive a final price
for both of these options from W.M. Lyles Co. in the near future. In addition,
the contract provides that if we cancel the construction contract in favor of
another contractor, we would be required to pay a termination fee of $5.0
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 planned
ethanol production facility 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 are currently negotiating the appropriate
levels of performance guarantees and associated liquidated damages. We have
currently authorized W. M. Lyles Co. to expend up to $15.0 million on site
development work.

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 on the property, with another
deep-water well scheduled for drilling, which we believe will be able to supply
nearly twice the annual requirements of our proposed ethanol production
facility. In addition, we have initiated the application process to annex the
Madera County property into the Madera Irrigation District, or the MID. Having
the Madera County site in the MID would allow us to buy water from the MID if
water quality degradation issues arise from drawing down the water table on the
property.

ACQUISITION OF ETHANOL PLANT

In August 2005, we executed an agreement to acquire PBI, a company that
has completed construction of what we believe is the first large-scale ethanol
production facility in California. The PBI facility has an annual ethanol
production capacity of approximately 25 million gallons, is located in Goshen,
California and is currently undergoing initial start-up testing. The closing of
the acquisition of PBI is contingent upon certain events, including our
obtaining all necessary funding to complete the acquisition, which we currently
estimate at approximately $40.0 million, the satisfactory completion of our due
diligence on PBI and on the ethanol production facility and our ability to
purchase all of the membership interests of PBI. We expect that the closing of
this acquisition, if it occurs, will occur in October 2005. We cannot provide
any assurances that the closing of our acquisition of PBI will not be delayed or
that the closing will occur at all.

Many of the challenges related to the construction of our Madera County
facility also apply to the new PBI ethanol production facility. Prior to
consummating the acquisition of PBI, we will have to undertake and complete
extensive due diligence, including obtaining satisfactory results from various
testing programs and engineering studies. See "Risk Factors."

COMPETITION

We operate in the highly-competitive ethanol marketing industry and
plan acquire an existing ethanol production facility and construct an additional
ethanol production facility 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.

We are aware of one ethanol production facility currently undergoing
initial start-up testing in Goshen, California, located approximately fifty
miles southeast of our Madera County site. This facility is owned by PBI. In
March 2005, we agreed with PBI, the owner of the Goshen production facility, to
market and sell PBI's entire ethanol production from this facility. We expect
initial production to be approximately 25 million gallons per year once PBI
commences operation of the facility, which is anticipated to occur during the
third quarter of 2005. The term of the agreement is two years from the date that
ethanol is first available for marketing from PBI's production facility. In
August 2005, we executed an agreement to acquire PBI.

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

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.

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

o OUR LOCATION IN CALIFORNIA. We believe that, after the earlier of
our planned acquisition of PBI, if it occurs, or 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 expect 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 consummation of our planned
acquisition of PBI, if it occurs, and upon completion of our
ethanol production facility in Madera County, if it occurs, we
expect to market and sell ethanol produced at these facilities
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, California 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 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 ninety-six 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 August 18, 2005, we employed 14 persons on a full-time basis,
including through our Kinergy and PEI California 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.

We have acquired real property located in Madera County, California
consisting of approximately 137 acres on which we are constructing an ethanol
production facility. We have an option to acquire additional real property
located in Visalia, California consisting of approximately 89 acres on which we
may construct another ethanol production facility and expand our operations. In
addition, we have executed an agreement to acquire PBI, a company that has
completed construction of what we believe is the first large-scale ethanol
production facility in California. The PBI facility is located in Goshen,
California and consists of approximately 20 acres.

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. ("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.
("Presidion") alleging that Presidion breached the terms of the Memorandum of
Understanding (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 ("Mercator") and various related and affiliated parties and
(iii) Taurus Global LLC ("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. 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 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 twenty-five percent (25%) contingency fee to the
law firm, shareholders of record on the closing date of the share exchange
transaction will receive two-thirds of the net proceeds from any Mercator Action
recovery and we will retain the remaining one-third for the benefit of the
shareholders at that time.

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The names, ages and positions held by our directors and executive
officers as of August 18, 2005 are as follows:

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

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

Neil M. Koehler.............. 46 Chief Executive Officer, President and Director

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

William G. Langley........... 55 Chief Financial Officer

Frank P. Greinke............. 49 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. ("BILL") 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 of 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. ("JACK") 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. 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 and its committees. During 2004, our
board of directors held two meetings attended by members of the board 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 Bill Jones is the father-in-law of Ryan 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.

CODE 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 named executives 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 executives 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
KOEHLER AND RYAN TURNER

The Executive Employment Agreement with Neil 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 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 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 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.

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 LANGLEY

The Executive Employment Agreement with William 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 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 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 committee has consisted of Messrs. Stone
and Friedman. The nominating committee utilizes a variety of methods for
identifying and evaluating nominees for director, including candidates that may
be referred by stockholders. Stockholders who desire to recommend candidates for
the board for evaluation may do so by contacting Pacific Ethanol in writing,
identifying the potential candidate and providing background information.
Candidates may also come to the attention of the nominating committee through
current board members, professional search firms and other persons. The
nominating committee operates pursuant to a charter approved by our board of
directors and Nominating 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 he served, held during the period for which he was a
director or committee member, respectively.

COMPENSATION OF DIRECTORS

The Chairman of the Board 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 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.

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 August 18, 2005, options to
purchase up to 133,000 shares of common stock were outstanding under the Amended
1995 Incentive Stock Plan. Our board 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 August 18, 2005, we had approximately 14 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 662,500 shares of common
stock were outstanding under the 2004 Stock Option Plan and 1,837,500 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 were 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.
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 WITH ACCESSITY 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, Ken 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 WITH OUR NOW-WHOLLY-OWNED SUBSIDIARIES 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 WITH PEI CALIFORNIA

Neil 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 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, California 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 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 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 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 Jones sold 300,000 shares of common stock of PEI California to Neil
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 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 WITH KINERGY

Neil 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 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 now one of our shareholders and owns 1,500,000 shares of our
common stock. Mr. Frank P. Greinke, the President of SC Fuels, Inc., is one of
our directors and is a director of PEI California. During the six months ended
June 30, 2005 and during the fiscal year ended December 31, 2004, SC Fuels, Inc.
accounted for approximately 7% and 13%, respectively, of the total revenues of
Kinergy.

TRANSACTIONS WITH REENERGY

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.

TRANSACTIONS WITH PACIFIC ETHANOL 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 connection with the Share Exchange Transaction, we entered into
Confidentiality, Non-Competition and Non-Solicitation Agreements with each of
Neil Koehler, Tom Koehler, William Jones and Ryan 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 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 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 Jones, options to purchase up to 20,000 shares of
our common stock to Terry Stone, options to purchase up to 15,000 shares of our
common stock to Frank 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
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 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 Bader, a director, and options to purchase up to
15,000 shares of our common stock to John 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.

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 August 18, 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 28,608,491 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) 8.74%
Neil M. Koehler.................................... Common 4,188,889 14.64%
Ryan W. Turner..................................... Common 914,166 (2) 3.20%
William G. Langley................................. Common 85,000 (3) *
Frank P. Greinke................................... Common 1,500,000 (4) 5.24%
Charles W. Bader................................... Common -- *
John L. Prince..................................... Common -- *
Terry L. Stone..................................... Common -- *
Kenneth J. Friedman................................ Common 73,399 (5) *
Crestview Capital Master, LLC...................... Common 2,704,000 (6) 9.25%
Lyles Diversified, Inc............................. Common 2,000,000 (7) 6.99%
Rubicon Master Fund................................ Common 1,742,000 (8) 6.00%
All executive officers and directors as a group
(9 persons)..................................... Common 9,261,454 (9) 32.26%
-------------------

* 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 Southern Counties Oil Co., a California limited
partnership. Mr. Greinke is the Chief Executive Officer of Southern
Counties Oil Co., a California corporation, which is the General Partner
of Southern Counties Oil Co., a California limited partnership. Mr.
Greinke has sole voting and sole investment power over the shares held by
the partnership.
(5) Includes 16,000 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 101,000 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 11,503,454 shares of common stock, including an
aggregate of 8,575,867 issued and outstanding shares of our common stock and an
aggregate of 2,927,587 shares of our common stock underlying warrants. The
following table sets forth, to our knowledge, certain information about the
selling security holders as of August 18, 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, each
selling security holder has indicated to us that it is acting individually, not
as a member of a group, and none of the selling security holders or their
affiliates 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
securities in connection with certain private placement transactions of PEI
California that occurred prior the consummation of the Share Exchange
Transaction described elsewhere in this prospectus:

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 LibertyView Funds, LP and LibertyView Special Opportunity Fund, LP
are subsidiaries of Neuberger Berman, LLC, an NASD-registered
broker dealer;
o Benchmark Partners, LP is 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;

o James George is a Senior Vice President, Institutional Bond Sales
of Countrywide Securities, an NASD-registered broker dealer; and
o Laird Q. Cagan, Registered Representative of Chadbourn Securities,
Inc., an NASD-registered broker-dealer.

The following entities or persons are NASD-registered broker-dealers,
or affiliates of NASD-registered broker-dealers, who received warrants as
compensation for services rendered as placement agents, or who are transferees
of those placement agents, in certain private placement transactions of PEI
California that occurred prior to the consummation of the Share Exchange
Transaction described elsewhere in this prospectus:

o Laird Q. Cagan, Registered Representative of Chadbourn Securities,
Inc., 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.

Each of the selling security holders 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, LP........................ 117,000 (21) * 52,000 (21) - -
Jean F. Hieber................................ 65,000 (22) * 65,000 (22) - -
Civic Capital Fund I, LLC..................... 39,000 (23) * 39,000 (23) - -
Jacob S. Harris............................... 169,000 (24) * 39,000 (24) - -
Jeremy Harding................................ 39,000 (25) * 39,000 (25) - -
Peter S. Rawlings............................. 39,000 (26) * 39,000 (26) - -
Richard Zorn.................................. 39,000 (27) * 39,000 (27) - -
Scott M. Hergott and Cheryl L. Hergott, Trustees
of the Scott M. and Cheryl L. Hergott Living
Trust 2003 dated 12/18/03.................. 39,000 (28) * 39,000 (28) - -
Erik Kuntz.................................... 26,000 (29) * 26,000 (29) - -
Growth Ventures Inc. Pension Plan & Trust..... 26,000 (30) * 26,000 (30) - -
Harry Haushalter and Theresa Haushalter JTROW. 26,000 (31) * 26,000 (31) - -
Mitchell N. Kessler........................... 26,000 (32) * 26,000 (32) - -
Ronald B. Sunderland.......................... 26,000 (33) * 26,000 (33) - -
Sensus LLC.................................... 26,000 (34) * 26,000 (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 (35) - -
Brent Saunders and Amy Saunders JTROW......... 13,000 (36) * 13,000 (36) - -
Cantybay Enterprises, Ltd..................... 13,000 (37) * 13,000 (37) - -
Christina J. Hieber........................... 13,000 (38) * 13,000 (38) - -
Daniel J. Hurley, III......................... 13,000 (39) * 13,000 (39) - -
Douglas M. Kerr and Joan Walter JTROW......... 13,000 (40) * 13,000 (40) - -
Edmund Karam and Barbara Karam JTROW.......... 13,000 (41) * 13,000 (41) - -
Gem Holdings, LLC............................. 13,000 (42) * 13,000 (42) - -
Georgeanne S. Eaton........................... 13,000 (43) * 13,000 (43) - -
Gregg Mullery................................. 23,000 (44) * 23,000 (44) - -
Harvey B. Jacobson, Jr........................ 13,000 (45) * 13,000 (45) - -
Jack Fishman.................................. 13,000 (46) * 13,000 (46) - -
Jennifer M. Hieber............................ 13,000 (47) * 13,000 (47) - -
Marie Carlino................................. 13,000 (48) * 13,000 (48) - -
Mary A. Susnjara IRA.......................... 13,000 (49) * 13,000 (49) - -
Dana Miller................................... 13,000 (50) * 13,000 (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 (51) - -
Robert P. Maerz............................... 13,000 (52) * 13,000 (52) - -
Roger L. Goettsche............................ 13,000 (53) * 13,000 (53) - -
Swartz Family Holdings, LLC................... 13,000 (54) * 13,000 (54) - -
Estate of Barbara White Fishman............... 13,000 (55) * 13,000 (55) - -
William Alexander............................. 13,000 (56) * 13,000 (56) - -
William D. Hyler.............................. 13,000 (57) * 13,000 (57) - -
Anne O'Malley................................. 6,500 (58) * 6,500 (58) - -
Venkata Kollipara............................. 46,500 (59) * 16,500 (59) 10,000 *
James and Bernice Campbell.................... 8,500 (60) * 8,500 (60) - -

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
---------------------------------------------- --------- ---------- --------- ------ ----------
Malcolm B. O'Malley........................... 6,500 (61) * 6,500 (61) - -
W. Denman Zirkle.............................. 126,666 * 126,666 - -
Bradley Rotter, as Trustee of the Bradley N.
Rotter Self-Employed Pension & Trust....... 216,667 (62) * 66,667 (62) - -
Joseph B. Childrey............................ 40,000 * 40,000 - -
Barry Fay..................................... 35,000 * 35,000 - -
David DeSilva................................. 35,000 * 35,000 - -
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 - -
Elizabeth A. Reed............................. 17,000 * 17,000 - -
Luise Bettina Zirkle-Garcia................... 16,667 * 16,667 - -
Sigrid Anne Zirkle Carroll.................... 16,667 * 16,667 - -
William Wade Zirkle........................... 16,667 * 16,667 - -
Illiquid Assets Trust, U/T/A dated November 22,
1999, FBO Peter H. Koehler, Jr............. 16,667 (66) * 16,667 (66) - -
Roger H. Manternach........................... 16,667 * 16,667 - -
Michael Kemp.................................. 14,000 * 14,000 - -
Michael A. Frangopoulos....................... 10,000 (67) * 10,000 (67) - -
Venkata Kollipara, Custodian for Priya Kollipara 46,500 (68) * 10,000 (68) 10,000 *
Venkata Kollipara, Custodian for Puneet Kollipara 46,500 (69) * 10,000 (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 - -
Daniel J. Yates............................... 10,000 * 10,000 - -
Alex Jachno and Agafia Jachno................. 12,000 * 12,000 - -
Armen Arzoomanian............................. 10,000 * 10,000 - -
Lakshmana R. Madala, M.D. Defined Benefits Plan 13,400 (70) * 10,000 (70) - -
Dermot Fallon................................. 8,000 * 8,000 - -
Jay D. Scott.................................. 8,000 * 8,000 - -
John G. Fallon and Anne M. Fallon............. 8,000 * 8,000 - -
Henry H. Mauz, Jr............................. 8,000 * 8,000 - -
Katharine B. Moore............................ 7,000 * 7,000 - -
Louis S. Lyras................................ 7,000 * 7,000 - -
Edward W. Muransky, as Trustee of the Edward W.
Muransky Revocable Trust, dtd July 24, 1995 7,000 * 7,000 - -
Kennon Harlen White........................... 7,000 * 7,000 - -
R.V. Edwards, Jr.............................. 17,000 * 17,000 - -
Janet Dumper.................................. 5,000 * 5,000 - -
Robert A. Dumper.............................. 5,000 * 5,000 - -

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
---------------------------------------------- --------- ---------- --------- ------ ----------
John Burke.................................... 5,000 * 5,000 - -
Howard Kaplan................................. 10,000 * 10,000 - -
James Burkdoll................................ 4,000 * 4,000 - -
Richard DeSousa............................... 4,000 * 4,000 - -
Steve Elefter................................. 4,000 * 4,000 - -
David Jessen.................................. 4,000 * 4,000 - -
Boyd and Barbara LaCosse...................... 3,400 * 3,400 - -
Lakshmana R. Madala........................... 13,400 (71) * 3,400 (71) - -
Thomas McFaul................................. 3,400 * 3,400 - -
Anne P. Zirkle................................ 3,333 * 3,333 - -
Rogene Scott Turner TTEE Rogene Scott Turner
Trust dtd. 9/10/91......................... 3,000 * 3,000 - -
Samuel Kozasky................................ 2,000 * 2,000 - -
Linden Growth Partners, L.P................... 625,000 (72) 2.18% 250,000 (72) 375,000 1.19%
Bradley N. Rotter............................. 216,667 (73) * 150,000 (73) - -
Michael L. Peterson........................... 287,500 (74) 1.00% 37,500 (74) 250,000 *
Andrew Hoffman................................ 25,000 * 25,000 - -
Barry J. Uphoff............................... 12,500 * 12,500 - -
Stephen J. George............................. 12,500 * 12,500 - -
James George.................................. 12,500 * 12,500 - -
R. Oliver Bock and Deirdre A. Stegman, as
Trustees of the Bock Stegman Trust dated
January 11, 2000........................... 43,333 (75) * 43,333 (75) - -
Michael T. Bock, Trustee of the Michael T. Bock
Revocable Trust dated November 10, 2003.... 43,333 (76) * 43,333 (76) - -
Jon Spar and Karen A. Kulikowski.............. 35,100 (77) * 35,100 (77) - -
Peter A. Bock................................. 13,000 (78) * 13,000 (78) - -
Helain Kaplan................................. 150,000 * 150,000 - -
Doug Dickson.................................. 45,000 * 45,000 - -
Paul P. Koehler............................... 72,223 * 25,000 47,223 *
Jeffrey H. Manternach......................... 25,000 (79) * 25,000 (79) - -
Laird Q. Cagan................................ 848,949 (80) 2.94% 236,449 (80) 612,500 1.94%
Frank Siefert................................. 1,000 (81) * 1,000 (81) - -
Prima Capital Group, Inc...................... 30,320 (82) * 30,320 (82) - -
Chadbourn Securities, Inc..................... 12,918 (83) * 12,918 (83) - -
Fairmont Analytics, Inc....................... 12,500 (84) * 12,500 (84) - -
Demetri Argyropoulos.......................... 5,300 (81) * 5,300 (81) - -
Kathleen Cole................................. 5,000 (81) * 5,000 (81) - -
Patricia Prass................................ 2,000 (81) * 2,000 (81) - -
Barbara Hall.................................. 2,000 (81) * 2,000 (81) - -
Robert A. Bonelli............................. 50,000 (81) * 50,000 (81) - -
Stephen J. Perrone............................ 50,000 (81) * 50,000 (81) - -
William P. Behrens............................ 40,000 (81) * 40,000 (81) - -
Danny Nicholas................................ 15,000 (81) * 15,000 (81) - -
David T. R. Tsiang............................ 33,000 (81) * 33,000 (81) - -
Yaudoon Chiang................................ 34,000 (81) * 34,000 (81) - -

-------------
* Less than 1.00%
(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. Also includes 104,000 shares, including 24,000 shares underlying
warrants, held by Lorraine DiPaolo, which shares are also being offered
under this prospectus; accordingly, no shares are shown as being
beneficially owned after the offering.
(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 Neuberger
Berman, Inc. as sole managing member of Neuberger Berman Asset
Management, LLC, as General Partner of LibertyView Special Opportunities
Fund, LP. Also includes 130,000 shares, including 30,000 shares
underlying warrants, 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 Neuberger Berman, Inc. as sole managing member of Neuberger
Berman Asset Management, LLC, as General Partner of LibertyView Funds,
LP; accordingly, no shares are shown as being beneficially owned after
the offering.
(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. Also includes 195,000
shares, including 45,000 shares underlying warrants, 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; accordingly, no shares are shown as being beneficially owned
after the offering.
(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. Also includes 65,000
shares, including 15,000 shares underlying warrants, 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; accordingly, no shares are shown as being
beneficially owned after the offering.

(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. Also includes 234,000
shares, including 54,000 shares underlying warrants, 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; accordingly, no shares are shown as being beneficially owned
after the offering.
(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. Also includes 39,000 shares, including 9,000 shares
underlying warrants, held by Jacob S. Harris, which shares are also being
offered under this prospectus; accordingly, no shares are shown as being
beneficially owned after the offering.
(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 Neuberger
Berman, Inc. as sole managing member of Neuberger Berman Asset
Management, LLC, as General Partner of LibertyView Funds, LP. Also
includes 299,000 shares, including 69,000 shares underlying warrants,
held by LibertyView Special Opportunity Fund, LP, which shares are also
offered under this prospectus, the power to vote or dispose of which is
also held by Neuberger Berman, Inc. as sole managing member of Neuberger
Berman Asset Management, LLC, as General Partner of LibertyView Special
Opportunity Fund, LP; accordingly, no shares are shown as being
beneficially owned after the offering.
(14) Includes 30,000 shares underlying warrants.
(15) Includes 24,000 shares underlying warrants and 80,000 shares of common
stock. Also includes 351,000 shares, including 81,000 shares underlying
warrants, 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.
(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. Also includes 221,000 shares, including
51,000 shares underlying warrants, 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; accordingly, no shares are shown as being
beneficially owned after the offering.
(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. Also includes 52,000
shares, including 12,000 shares underlying warrants, 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; accordingly, no shares are
shown as being beneficially owned after the offering.
(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. Also includes 65,000
shares, including 15,000 shares underlying warrants, 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; accordingly, no shares are
shown as being beneficially owned after the offering.
(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 130,000 shares, including 30,000 shares underlying
warrants, 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.
(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.
(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.
(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) 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.

(73) 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.
(74) Amount beneficially owned includes 250,000 shares held by the Peterson
Family Trust, DTD 8/16/2000. Power to vote or dispose of these 250,000
shares is shared by Michael L. Peterson and Shelley P. Peterson as
Trustees of the Peterson Family Trust, DTD 8/16/2000.
(75) 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.
(76) Includes 10,000 shares underlying warrants.
(77) Includes 8,100 shares underlying warrants.
(78) Includes 3,000 shares underlying warrants.
(79) Represents shares underlying warrants.
(80) 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.
(81) Represents shares underlying warrants.
(82) 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.
(83) Represents shares underlying warrants. Power to vote or dispose of the
shares is held by as of Chadbourn Securities, Inc.

(84) Represents shares underlying warrants. Power to vote or dispose of the
shares is held by as of Fairmont Analytics, Inc.
(85) Represents shares underlying warrants. Power to vote or dispose of the
shares is held by as of Blair Capital, Inc.
(86) Represents shares underlying warrants. Power to vote or dispose of the
shares is held by as of Sycamore Capital Partners, Inc.

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

All of the shares of common stock being offered under this prospectus
were issued, or are issuable upon exercise of warrants that were issued, in the
below-described private placement transactions.

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.

ISSUANCES SUBSEQUENT TO THE SHARE EXCHANGE TRANSACTION

On June 23, 2005, we granted 25,000 shares of common stock to Paul
Koehler and 45,000 shares of common stock to Doug Dickson as signing bonuses in
connection with their acceptance of employment.

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 August 18, 2005, there were 28,608,491 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. We have no present plans to issue any shares of or to designate any
series of preferred stock.

WARRANTS

As of August 18, 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 August 18, 2005, we had outstanding options to purchase 795,500
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."

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

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.

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 450 Fifth Street, N.W., 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 June 30, 2005 (unaudited) and December 31, 2004...............F-2
Consolidated Statement of Operations for the Three and Six Months Ended
June 30, 2005 and 2004 (unaudited).........................................................F-4
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2005 and 2004 (unaudited).........................................................F-5
Notes to Consolidated Financial Statements for the Six Months Ended
June 30, 2005 (unaudited)..................................................................F-7

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

Report of Independent Registered Public Accounting Firm.........................................F-15
Consolidated Balance Sheets as of December 31, 2004 and 2003....................................F-16
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-17
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-18
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-19
Notes to Consolidated Financial Statements......................................................F-20

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

Report of Independent Registered Public Accounting Firm.........................................F-38
Balance Sheets as of December 31, 2004, 2003 and 2002...........................................F-39
Statements of Income and Member's Equity for the Years Ended December 31, 2004, 2003
and 2002...................................................................................F-40
Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002...................F-41
Notes to Financial Statements...................................................................F-42

Reenergy, LLC
-------------

Report of Independent Registered Public Accounting Firm.........................................F-47
Balance Sheets as of December 31, 2004, 2003 and 2002...........................................F-48
Statements of Operations for the Years Ended December 31, 2004, 2003 and 2002...................F-49
Statements of Member's Equity (Deficit) for the Years Ended December 31, 2004, 2003
and 2002...................................................................................F-50
Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002...................F-51
Notes to Financial Statements...................................................................F-52

Index to Pro Forma Financial Statements.........................................................F-54
---------------------------------------

F-1

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

June 30,
2005 December 31,
(unaudited) 2004
----------- ----------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $16,427,839 $ 42
Accounts receivable, net 2,112,200 8,464
Inventories 1,111,960 --
Prepaid expenses 785,151 293,115
Deposits 5,400 --
Related party notes receivable 5,410 5,286
Business acquisition costs -- 430,393
Other receivables 52,313 48,806
Restricted cash 280,000 --
----------- ----------
Total current assets 20,780,273 786,106

PROPERTY AND EQUIPMENT, NET 9,136,333 6,324,824

OTHER ASSETS:
Debt issuance costs, net 58,333 68,333
Intangible assets, net 11,562,666 --
----------- ----------
Total other assets 11,620,999 68,333
----------- ----------

TOTAL ASSETS $41,537,605 $7,179,263
=========== ==========

See accompanying notes to condensed consolidated financial statements.

F-2

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

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

CURRENT LIABILITIES:
Accounts payable - trade $ 2,511,831 $ 383,012
Accounts payable - related party 1,700,240 846,211
Accrued payroll -- 18,963
Accrued interest payable -- 30,864
Other accrued liabilities 833,454 531,803
------------ -----------
Total current liabilities 5,045,525 1,810,853

RELATED-PARTY NOTE PAYABLE 2,887,947 4,012,678

COMMITMENTS AND CONTINGENCIES (NOTE 5)

STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value; 10,000,000 shares
authorized, no shares issued and outstanding as of
June 30, 2005 and December 31, 2004 -- --
Common stock, $0.001 par value; 100,000,000 shares
authorized, 28,608,491 and 13,445,866 shares issued and
outstanding as of June 30, 2005 and December 31, 2004,
respectively 28,608 13,446
Additional paid-in capital 42,119,996 5,071,632
Unvested consulting expense (1,851,114) --
Due from stockholders (600) (68,100)
Accumulated deficit (6,692,757) (3,661,246)
------------ -----------
Total stockholders' equity 33,604,133 1,355,732
------------ -----------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 41,537,605 $ 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 SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)

Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net sales (including $1,496,178 and $ 22,814,433 $ 9,442 $ 25,116,430 $ 16,003
$1,849,236 for the three and six months
ended June 30, 2005, respectively, to a
related party)

Cost of goods sold 22,662,908 6,229 24,917,278 10,789
------------ ------------ ------------ ------------

Gross profit 151,525 3,213 199,152 5,214

Operating expenses:

Selling, general and administrative 1,474,696 235,038 1,792,668 427,058
expenses

Non-cash compensation and consulting 918,375 345,000 1,343,636 517,500
fees
------------ ------------ ------------ ------------

Loss from operations (2,241,546) (576,825) (2,937,152) (939,344)

Other income (expense):

Other income 104 310 26,395 51

Interest income (expense) 18,190 (136,739) (115,954) (266,995)
------------ ------------ ------------ ------------

Loss before provision for income taxes (2,223,252) (713,254) (3,026,711) (1,206,288)

Provision for income taxes 3,200 800 4,800 2,400

Net loss $ (2,226,452) $ (714,054) $ (3,031,511) $ (1,208,688)
============ ============ ============ ============

Weighted Average Shares Outstanding 27,977,127 12,106,596 21,415,102 11,927,493
============ ============ ============ ============

Net Loss Per Share $ (0.08) $ (0.06) $ (0.14) $ (0.10)
============ ============ ============ ============

See accompanying notes to condensed consolidated financial statements.

F-4

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

Six Months Ended
June 30,
-----------------------------
2005 2004
------------ -----------
Net loss $ (3,031,511) $(1,208,688)
Adjustments to reconcile net loss to
cash used in operating activities:
Depreciation and amortization 40,457 39,537
Amortization of debt issuance costs 235,334 10,000
Interest expense relating to amortization of debt discount 120,268 120,268
Non-cash compensation expense 883,250 --
Non-cash consulting expense 460,386 517,500

(Increase) decrease in:
Accounts receivable 407,923 15,525
Inventories (530,395) --
Prepaid expenses and other assets (663,450) (68,766)
Prepayments on product in transit 307,562 --
Other receivable (3,631) 217,096

Increase (decrease) in:
Accounts payable 288,656 (144,169)
Accounts payable, related party 854,029 247,556
Accrued payroll (18,963) 141,259
Accrued interest payable (31,315) 4,420
Accrued liabilities (13,859) (162,067)
------------ -----------
Net cash used in operating activities (695,259) (270,529)
------------ -----------

Cash flows from Investing Activities:
Additions to property, plant and equipment (2,845,742) (521,038)
Payment on related party notes receivable
-- 199,875
Issuance of related party notes receivable -- (33,491)
Net cash acquired in acquisition of Kinergy, ReEnergy
and Accessity 1,146,854 --
Costs associated with acquisition of Kinergy, ReEnergy
and Accessity (457,808) (202,192)
------------ -----------
Net cash provided by (used in) investing activities (2,156,696) (556,846)
------------ -----------

Cash flows from Financing Activities:
Proceeds from sale of stock, net 18,879,749 716,339
Proceeds from exercise of stock options 332,503 --
Receipt of stockholder receivable 67,500 --
------------ -----------
Net cash provided by financing activities 19,279,752 716,339
------------ -----------
Net increase (decrease) in cash and cash equivalents 16,427,797 (111,036)
Cash and cash equivalents at beginning of period 42 249,084
------------ -----------
Cash and cash equivalents at end of period $ 16,427,839 $ 138,048
============ ===========

See accompanying notes to condensed consolidated financial statements.

F-5

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

Non-Cash Financing and Investing activities:
Conversion of debt to equity $ 1,245,000 $ --
============ ===========
Issuance of stock for receivable $ 0 $ 199,750
============ ===========
Issuance of warrants for consulting services $ 2,139,000 $ 1,380,000
============ ===========
Issuance of warrants for employee compensation $ 883,250 $ --
============ ===========
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 $ 1,195,314 $ --
============ ===========

See accompanying notes to condensed consolidated financial statements.

F-6

PACIFIC ETHANOL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 AND 2005
(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 June 30, 2005 and the results of operations and the cash
flows of the Company for the six months ended June 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 six months ended June 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.

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.

F-7

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 six months ended June 30, 2004 consist only of the operations
of PEI California. The Company has consolidated the results of 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 six months ended June 30, 2005 consist of the operations of
PEI California for the entire six month period and the operations of
Kinergy and ReEnergy from March 23, 2005 through June 30, 2005.

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......... 11,788,000
--------------
Total assets acquired................ 18,808,420
Current liabilities..................... 4,253,177
Other liabilities....................... 83,017
--------------
Total liabilities assumed............ 4,336,194
--------------
Net assets acquired..................... $ 14,472,226
==============
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.
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 purchase price for Kinergy totaled $10,815,750.
Goodwill directly associated with the Kinergy and ReEnergy acquisitions
therefore totaled $2,952,000.

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 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-8

Six Months
Ended June 30,
----------------------------------
2005 2004
-------------- --------------

Net sales $ 48,721,682 $ 37,842,788
============== ==============
Net loss $ (3,273,776) $ (1,374,834)
============== ==============
Loss per share of common stock
Basic $ (0.12) $ (0.05)
============== ==============
Diluted $ (0.12) $ (0.05)
============== ==============

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 4), 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 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 additional goodwill of $506,000.

Immediately prior to the closing of the Share Exchange Transaction,
William Jones 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 $0.01 per share to compensate him for facilitating the
closing of the Share Exchange Transaction. The contribution of these
shares resulted in additional goodwill of $759,000.

Immediately prior to the closing of the Share Exchange Transaction,
William 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 goodwill of $253,000.

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

On January 10, 2005 and February 22, 2005, William 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-9

On January 10, 2005, Neil 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.

On January 14, 2005, February 4, 2005, March 10, 2005 and May 27, 2005,
Lyles Diversified, Inc. ("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 June 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, 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. (See Note 5) Additional costs related
to the financing include legal, accounting, consulting, and stock
certificate issuance fees that totaled approximately $270,658 through
June 30, 2005.

F-10

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
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.

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. (See
Note 5)

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. (See Note 5)

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 six months ended June 30, 2005 and 2004,
respectively.

F-11

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 $287,886 for consulting services vested during the
period from March 24, 2005 to June 30, 2005. The unvested warrants in
the amount of $1,851,114 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 $19,680 and $11,780 for the six months ended
June 30, 2005 and 2004, respectively.

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. 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.

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.

F-12

NON-CASH COMPENSATION - In December 2003, PEI California issued to an
employee stock options to acquire up to 25,000 shares of common stock
at an exercise price of $0.01 per share. In February 2004, the board of
directors of PEI California ratified the options, contingent upon the
Company's success in closing the Share Exchange Transaction. The stock
options vested in full on March 23, 2005 and were converted into a
warrant to acquire up to 25,000 shares of common stock of the Company.
Non-cash compensation expense was recognized in March 2005 in the
amount of $232,250 to record the fair value of the warrant. (See Note
4)

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. (See Note 4)

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.

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

STOCK OPTIONS - On July 19, 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 $6.61 per share, which exercise price equals
85% of the closing price per share of the Company's common stock on
that date. A non-cash charge of $20,475 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.

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.

F-13

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.

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 an
executive placement and consultancy firm.

EMPLOYMENT AGREEMENT - On August 10, 2005, the Company entered into an
Executive Employment Agreement with William 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.

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 intends 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, is $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 is greater or less than $9 million, the cash payment of
approximately $31 million is to be reduced or increased, respectively,
by an equal amount. The closing of the transaction is 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 terminates automatically in the event that the
closing of the purchase transaction does not occur by the earlier of
October 15, 2005 and the sixtieth day following the satisfaction of a
certain ethanol production milestone.

F-14

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-15

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-16

PACIFIC ETHANOL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

From January
30, 2003
For Year Ended (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-17

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 Due from
------------------- ------------------------ Paid-In Stock- Accumulated
Shares Amount Shares Amount Capital holders 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-18

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-19

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-20

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-21

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-22

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
to adopt its requirements using either a "modified prospective" method,
or a "modified retrospective" method. Under the "modified prospective"

F-23

PACIFIC ETHANOL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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-24

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-25

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-26

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-27

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
$204,81 as of December 31, 2004 and 2003, respectively, which is
reflected in accrued liabilities in the consolidated balance sheets.

F-28

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
$1,000,000 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-29

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-30

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
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)

F-31

PACIFIC ETHANOL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 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-32

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.

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.

F-33

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-34

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.............. 11,788,000
-----------
Total assets acquired..................... 18,808,420
Current liabilities.......................... 4,253,177
Other liabilities............................ 83,017
-----------
Total liabilities assumed................. 4,336,194
-----------
Net assets acquired.......................... $14,472,226
===========
Shares of common stock issued................ 6,489,414
===========

F-35

PACIFIC ETHANOL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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, 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
goodwill 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 goodwill of
$759,000.

F-36

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 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.

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.

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-37

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-38

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 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-39

KINERGY MARKETING LLC

STATEMENTS OF INCOME AND MEMBER'S EQUITY (DEFICIT)

For the years ended
December 31,
------------------------------------------------
2004 2003 2002
------------ ------------ ------------

NET SALES $ 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-40

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-41

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-42

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-43

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-44

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-45

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-46

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-47

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-48

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-49

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-50

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-51

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-52

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-53

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 June 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.

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 Six Months Ended June 30, 2005..................F-55

Notes to Unaudited Pro Forma Combined Consolidated Statements
of Operations for the Six Months Ended June 30, 2005...............F-56

Unaudited Pro Forma Combined Consolidated Statements of
Operations for the Year Ended December 31, 2004....................F-57

Notes to Unaudited Pro Forma Combined Consolidated Statements
of Operations for the Year Ended December 31, 2004.................F-58

F-54

UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2005

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

NET SALES $ -- $ 23,605,252 $ 25,116,430 $ -- $ 48,721,682

COST OF GOODS SOLD -- (23,207,602) (24,917,278) -- (48,124,880)
------- ------------ ------------ ----------- ------------

GROSS PROFIT -- 397,650 199,152 -- 596,802
------- ------------ ------------ ----------- ------------

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 346 72,240 1,792,668 129,615 (c) --
-- -- -- 190,666 (d) 2,185,535
NON-CASH COMPENSATION AND CONSULTING FEES -- -- 1,343,636 246,864 (e) 1,590,500
------- ------------ ------------ ----------- ------------

OPERATING INCOME (LOSS) (346) 325,410 (2,937,152) (567,145) (3,179,233)

OTHER INCOME (EXPENSE):
Other income -- 26,854 -- 26,854
Other (expense) -- -- (459) -- (459)
Interest income (expense) -- 616 (115,954) -- (115,338)
------- ------------ ------------ ----------- ------------
Total other income (expense) -- 616 (89,559) -- (88,943)
------- ------------ ------------ ----------- ------------

NET INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (346) 326,026 (3,026,711) (567,145) (3,268,176)

PROVISION FOR INCOME TAXES (800) -- (4,800) -- (5,600)
------- ------------ ------------ ----------- ------------
NET INCOME (LOSS) $(1,146) $ 326,026 $ (3,031,511) $ (567,145) $ (3,273,776)
======= ============ ============ =========== ============

LOSS PER SHARE
Basic $ (0.22) $ (0.12)
Diluted $ (0.22) $ (0.12)
Weighted average number of common shares 13,710,197 14,089,414 (a) 27,799,611
Weighted average number of diluted common shares 13,710,197 14,089,414 (b) 27,799,611

SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2005

F-55

NOTES TO UNAUDITED PRO FORMA
COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2005

1. (a) Reflects the weighted average of 14,089,414 shares issued in
connection with the Private Placement and Share Exchange Transaction.

(b) Reflects the weighted average of the 14,089,414 shares in (a) above,
plus all options, warrants and convertible securities of all the
entities that would be considered common share equivalents and be
dilutive, aggregating 31,870,329 shares. However, because the use of
these would be anti-dilutive and result in a lower loss per share, the
presentation uses the same shares as for basic weighted average and
loss per share.

(d) 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.

(e) 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-56

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 (c) --
696,000 (d) 2,686,452
NON-CASH COMPENSATION AND CONSULTING FEES -- -- 1,207,500 1,242,000 (e) --
232,250 (f) 2,681,750
----------- ------------ ----------- ----------- ------------

OPERATING INCOME (LOSS) (9,854) 2,933,919 (2,270,269) (2,805,250) (2,151,454)

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) (2,805,250) (2,686,989)

PROVISION FOR INCOME TAXES (800) (1,600) -- (2,400)
----------- ------------ ----------- ----------- ------------
NET INCOME (LOSS) $ (10,654) $ 2,929,082 $(2,802,567) $(2,805,250) $ (2,689,389)
=========== ============ =========== =========== ============

LOSS PER SHARE
Basic $ (0.23) $ (0.10)
Diluted $ (0.23) $ (0.10)
Weighted average number of common shares 12,396,895 14,089,414 (a) 26,486,309
Weighted average number of diluted common shares 12,396,895 14,089,414 (b) 26,486,309

SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2004

F-57

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 Private Placement and Share Exchange Transaction.

(b) Reflects the weighted average of the 14,089,414 shares in (a) above,
plus all options, warrants and convertible securities of all the
entities that would be considered common share equivalents and be
dilutive, aggregating 31,925,534 shares. However, because the use of
these would be anti-dilutive and result in a lower loss per share, the
presentation uses the same shares as for basic weighted average and
loss per share.

(f) To record employee non-cash compensation for options vested into a
warrant upon consummation of the Share Exchange.

F-58

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 $ 11,861.00

Legal fees and expenses *

Accounting fees and expenses *

Printing expenses *

Blue sky fees and expenses *

Transfer agent and registrar fees and expenses --

Miscellaneous $ *
-----------
Total $ *
===========
---------------
* To be provided by amendment.

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.
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 10.8
Form of Registration Rights Agreement 4.1

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

On March 23, 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.

On March 23, 2005, we 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. We 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. We also
entered into a registration rights agreement in which we agreed to register for
resale the shares of common stock issued to investors and the shares of common
stock issuable upon exercise of the investor warrants and placement warrants.

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.

II-2

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.

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.

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.

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 30, 2005, we issued 28,749 shares of common stock to a
consultant upon exercise of an outstanding warrant with an exercise price 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.

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

4.5 Form of Placement Warrant dated effective of various dates issued
by Pacific Ethanol, Inc., a California corporation, to certain
placement agents

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

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

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

4.10 Warrant dated March 23, 2005 issued by the Registrant to Jeffrey
H. Manternach

5.1 Opinion of Rutan & Tucker, LLP (*)

10.1 Standard Form of Design-Build Agreement and General Conditions
Between Owner and Design-Builder dated July 7, 2003 between
Pacific Ethanol, Inc., a California corporation and W.M. Lyles
Co.

10.2 Contractual Amendment 1.0 dated as of May 10, 2004 between
Pacific Ethanol, Inc., a California corporation and W.M. Lyles
Co.

10.3 Contractual Amendment 2.0 dated as of March 18, 2005 between
Pacific Ethanol, Inc., a California corporation and W.M. Lyles
Co.

10.4 Confidentiality, Non-Competition, Non-Solicitation and Consulting
Agreement dated March 23, 2005 between the Registrant and Barry
Siegel (1)

10.5 Confidentiality, Non-Competition, Non-Solicitation and Consulting
Agreement dated March 23, 2005 between the Registrant and Philip
B. Kart (1)

10.6 Form of Confidentiality, Non-Competition and Non-Solicitation
Agreement dated March 23, 2005 between the Registrant and each of
Neil Koehler, Tom Koehler, William Jones, Andrea Jones and Ryan
Turner (1)

10.7 Confidentiality, Non-Competition and Non-Solicitation Agreement
dated March 23, 2005 between the Registrant and Neil Koehler (1)

10.8 Form of Indemnification Agreement between the Registrant and each
of its Executive Officers and Directors (#)(1)

10.9 Executive Employment Agreement dated March 23, 2005 between the
Registrant and Neil Koehler (#)(1)

10.10 Executive Employment Agreement dated March 23, 2005 between the
Registrant and Ryan Turner (#)(1)

10.11 Stock Purchase Agreement and Assignment and Assumption Agreement
dated March 23, 2005 between the Registrant and Barry Siegel (1)

10.12 Letter Agreement dated March 23, 2005 between the Registrant and
Neil Koehler (1)

10.13 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)

10.14 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)

10.15 Ethanol Purchase and Marketing Agreement dated March 4, 2005
between Kinergy Marketing, LLC and Phoenix Bio-Industries, LLC
(2)

II-5

NUMBER DESCRIPTION
------ -----------

10.16 2004 Stock Option Plan (3)

10.17 Amended 1995 Stock Option Plan (4)

10.18 Warrant dated March 23, 2005 issued by the Registrant to Liviakis
Financial Communications, Inc. (1)

10.19 Executive Employment Agreement dated August 10, 2005 between the
Registrant and William G. Langley (#)(5)

10.20 Form of Membership Interest Purchase Agreement between the
Company and the Holders of the Membership Interests of Phoenix
Bio-Industries, LLC (5)

21.1 Subsidiaries of the Registrant

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 (contained on the signature page hereto)

---------------
* 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 is filed as Exhibit 4.4
hereto and incorporated herein by reference.

II-6

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.

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

II-7

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-8

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 August 19, 2005.

PACIFIC ETHANOL, INC.

By: /S/ NEIL M. KOEHLER
-------------------------------------
Neil M. Koehler
President and Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that the undersigned officers and
directors of Pacific Ethanol, Inc., a Delaware corporation, which is filing a
registration statement on Form S-1 with the Securities and Exchange Commission
under the provisions of the Securities Act of 1933, as amended, hereby
constitute and appoints Neil Koehler, their true and lawful attorney-in-fact and
agent; with full power of substitution and resubstitution, for him or her and in
his or her name, place and stead, in any and all capacities, to sign such
registration statement and any or all amendments to the registration statement,
including a prospectus or an amended prospectus therein, and all other documents
in connection therewith to be filed with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all interests and purposes as they might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agents, or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.

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
--------------------------------------------- --------------------------------------- ---------------
/S/ WILLIAM L. JONES Chairman of the Board and Director August 19, 2005
---------------------------------------------
William L. Jones
/S/ NEIL M. KOEHLER President, Chief Executive Officer and August 19, 2005
--------------------------------------------- Director (principal executive officer)
Neil M. Koehler
/S/ WILLIAM G. LANGLEY Chief Financial Officer (principal August 19, 2005
--------------------------------------------- accounting officer)
William G. Langley
/S/ FRANK P. GREINKE Director August 19, 2005
---------------------------------------------
Frank P. Greinke
/S/ CHARLES W. BADER Director August 19, 2005
---------------------------------------------
Charles W. Bader
/S/ JOHN L. PRINCE Director August 19, 2005
---------------------------------------------
John L. Prince
/S/ TERRY L. STONE Director August 19, 2005
---------------------------------------------
Terry L. Stone
/S/ KENNETH J. FRIEDMAN Director August 19, 2005
---------------------------------------------
Kenneth J. Friedman

II-9

INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------