UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YORK

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MILTON ARIAI'L, Individually And }On Behalf of All Others Similarly Situated, }}

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Plaintiff, }

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vs, )

XETHANOL CORPORATION, LAWRENCE }S. BELLONE, CHRISTOPHER D'ARNAU D- }TAYLOR AND ,IEFFERY S. LANGBERG, )

Defendants. )

CIVIL ACTION NO . 46-10234

CLASS ACTION COMPLAINTFOR VIOLATIONS OFFEDERAL SECURITIES LAW S

JURY TRIAL DEMANDE D

INTRODUCTIO N

This is a federal class action on behalf ofd pu rchase rs of the common stock of Xethano l

Corporation ("Xetllanol" or the "Coinpany") between January 31, 2006 and August 8, 2006 ,

inclusive (the `Class Period"), seeking to pursue remedies under- the Securities Exchange Act o f

1934 (the "Exchange Act") . As alleged herein, defendants published a series of materially fals e

and misleading statements that defendants knew and/or recklessly disregarded were materiall y

false and misleading at the time of such publication . and that omitted to reveal materia l

information necessary to make defendants' statements, in light of such material omissions, no t

materially false and misleading

OVERVIEW

1 Xethanol engages in the production and marketing of ethanol and its co-product s

in the United States . Ethanol. a clean burning, renewable fuel, is used as a primary gasolin e

additive . As a result of the recent rise in gasoline prices, to over $3 .00 per gallon in man y

places, during 2006, alternative energy companies such as Xethanol suddenly received th e

attention of the national press, and became a favored investment for many shareholders .

?. Helping to propel the trading price of its shares, throughout the Class Period .

Xethanol distinguished itself from other ethanol producers by its ability to develop and optimiz e

"biomass" as the substantial raw material for ethanol production ; as well as corn, the mor e

traditional raw material used in ethanol production. This distinction was critical to investor s

because biomass ethanol production has a distinct competitive advantage over corn ethano l

production . Biomass - - generally post-industrial food or paper production waste - - has no cos t

(or even negative cost), it is available locally in markets where demand for ethanol is alread y

high, and it does not require the use of additional valuable resources or energy for its production .

3 .. At all relevant tines , Xethanol portrayed itself as an early -stage biomass ethano l

production company that utilized a business model predicated upon the commercialization o f

biomass produced ethanol. Defendants repeatedly stated that Xethanol's plan called for th e

Company. first, to sustain itself on revenues produce(] from traditional corn ethanol production .

and with the money raised fro n both public and private investors . defendants consistently state d

that Xethanol was entering its second phase of development . The second phase of developmen t

for Xethanol called for the Company to conirnercialize biomass ethanol production in th e

immediate near -term.

4. Thus, to reach its clear-term business objectives , throughout the Class Period ,

defendants purported to own and operate two ethanol plants in Iowa - - Xethanol BioFuels i n

Blairstown and Permeate Refining in Hopkinton . The first of these plants was a corn based plan t

that was in operation at all relevant tinges . The second, the Permeate Refining plant . purported to

have previously used candy production waste to create biomass ethanol . According to

defendants, however, by the inception of the Class Period, this second plant had been

"temporarily" shut down as part of Xethanol's growth plan, so that it could be "refurbished ."

updated and returned to service as a multi-stream, or pure-biomass ethanol production facility .

5 . In addition to the two Company-run plants, throughout the Class Period ,

defendants also reported that Xethanol had formed joint ventures to expand its ethano l

production locally and regionally . The announcements of Xethanol's Joint ventures were also

very important to investors because they represented the Company's first regional strategic

alliances - - formed to develop and execute business opportunities outside the corn-belt of Iowa . .

These .joint ventures represented critical milestones in the Company' s evolution , because they

purported to evidence Xethanol's ability to produce ethanol locally, using post consumer, or post

industrial bio€nass waste streams .

6 . The statements concerning the Company's plant . as well as the announcement o f

its joint ventures, served to bolster investors ' belief that Xethanol was operating according to

plan and was alrendv reaching its second stage of development - - the commercialization o f

biomass ethanol production . In addition to the foregoing, throughout the Class Period .

defendants also stated that Xethanol maintained a complex system of internal controls an d

procedures that reasonably assured the veracity and completeness of'the Conmpany's statement s

and disclosures .

7 .. The combination of defendants' positive statements about the Company as well a s

Xethanol's representations concerning its management and its internal controls, caused Xethano l

shares to trade above $15 .00 by late-April 2006 .. Moreover, during the Class Period, there was a

large spike in Xethanol trading volume, as Company shares suddenly and regularly trade d

several hundred thousand units, and even several million units, per day .

8 . Unbeknownst to investors, however, throughout the Class Period, Xethanol shares

had been artificially inflated and the statements made by defendants, as well as the

representations concerning the Company's systems and controls were either patently untrue, o r

these systems were providing defendants with information throughout the Class Period that the y

knew or recklessly disregarded, was in stark contrast to the statements concerning ; the

Company's strength and profitability ..

9 . Throughout the Class Period, the Company was suffering from a host o f

undisclosed adverse factors that were negatively impacting Xethanol's business . In fact, amon g

other undisclosed problems, at all times during the Class Period :

It was not true that the Company was being run by management with credibilityand a high standard of ethics . nor was it true that defendant Taylor had significantmanagement experience at major domestic corporations . In fact, defendant Taylo rhad fabricated his resume, and many of the Conmpany s initial investor's had prior

histories of stock fraud, market abuse . breach of fiduciary duty and breach of

contract .

Defendants had misrepresented the true state of: the Company's Hopkinton, Iowa

plant .. In fact, at all relevant tines, this plant was not being refurbished but, rather,

it lay abandoned and neglected with no current water or sewer service and no

employees working at the site .

0 Defendants had omitted disclosing a host of related party transactions, as well asassociations with several early stage investors that had alarming records of stockf aud, market manipulation, breach of fiduciary duty and shareholder abuse .. Itnow appears that defendants utilized a reverse merger into a shell corporation toavoid disclosing many of these relationships and its related parties .

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Defendants had materially overstated the Company's profitability by under-reporting Xethanol's true cost of completing a biomass to ethanol productionfacility and by falling, to make proper, timely adjustments to the Company's statedfinancial reports and balance sheet .

• Throughout the Class Period, it was also not true that Xethanol containedadequate systems of internal operational or financial controls, such thatXethanol's operational and financial reports were true, accurate or reliable . .

e As a result of the foregoing, it also was not true that the Company's financialstatements and repo rts were prepared in accordance with GAAP ad SEC rules . Inaddition , because of the lack of true independence between the Company andmany of its business partners and Joint venture partners. and because of othermaterial omissions and misrepresentations , the risk of investing in Xethanol wasmaterially higher than defendants disclosed, and than investors could disce rnthrough a reasonable due diligence investigation .

e As a result of the aforementioned adverse conditions which defendants failed todisclose, throughout the Class Period, defendants lacked any reasonable basis toclaim that the Company was operating according to plan, or that Xethanol couldachieve the near-tens commercialization of biomass ethanol production . orachieve the guidance sponsored and/or endorsed by defendants, .

10. It was only at the end of the Class Period, however, that investors ultimately

learned the truth about the Company after a forensic securities investigations Internet websit e

called ShareVeuth com published a widely circulated report that was highly critical ol'Xethano l

and its management. Among other things, this report stated that there was little evidence

Xethanol had produced significant amounts of ethanol from hioina .ss to claim that it could

achieve commercialization, and that substantial related party associations had not been disclose d

including the fact that ,nafit ' of the Company 's ear°lty investors had been disciplined bt '

regulatory agencies . and that diferrdrnlt Taylor had hlatantIj y lied about his work experience

and qualifications on his resume .

11 . As investors now know, defendants were motivated to, and did, conceal the tru e

operational and financial condition of Xethanol, and materially misrepresented and failed t o

disclose the conditions that were adversely affecting Xetl~ai of throughout the Class Period ,

5

because: (i) it enabled defendants to artificially inflate the price of Company shares ; (ii) i t

enabled defendants to register for sale with the SEC, millions of shares of Company stock hel d

by insiders and/or defendants and also allow defendants to raise over $45 million through th e

private sale of equity, each while in possession of material adverse non-public information about

Xethanol ; (iii) it enabled certain insiders, including defendants Taylor and Langberg to liquidat e

millions of dollars of their- personally held Xethanol shares, also while in possession of materia l

adverse non-public information about the Company ; and (iv) it caused investors to purchase o r

acquire shares of Xethanol stock at artificially inflated prices ..

JURISDICTION AND VENU E

12. The claims asserted herein arise under and pursuant to Sections l0(b) and 20(a) o f

the Exchange Act [15 U .S .C .. §S 78,j(b) and 78t(a)] and Rule lOb-5 promulgated thereunder b y

the United States Securities and Exchange Commission ( :`SEC") [17 C .F.R. § 240 .1Ob-5 .

13. This Court has jurisdiction over the subject matter of this action pursuant to 2 8

U.S ..C. §§ 1331 and 1337, and Section 27 of the Exchange Act [15 U.S .C .. § 78aa -

14 .. Venue is proper in this District pursuant to Section 27 of the Exchange Act, an d

23 U .S.C .. § 1391(b) . Xethanol maintains its principal place of business in this District an d

many of the acts and practices complained of (herein occurred in substantial part in this District ..

15 . In connection with the acts alleged in this complaint, defendants, directly o r

indirectly, used the means and instrumentalities of interstate corriinerce, including, but no t

limited to, the mails, interstate telephone coramII unications and the facilities of the national

securities markets .

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PARTIES

16, Plaintiff Milton Ariail, as set forth in the accompanying certification, incorporated

by reference herein, purchased the common stock of Xethanol at artificially inflated prices

during the Class Period and has been damaged thereby ,

17 . Defendant XETI-I.ANOL CORPORATION is a Delaware corporation with it s

principal place of business located at 118 5 Avenue of the Americas, New York, NY 100 .36 ..

According to the Company's profile, founded in 2000, Xethanol engages in the production and

marketing of ethanol and its co-products in the United States . Ethanol, a clean burning,

renewable 1'crel, is used as a primary gasoline additive . At all tires . Xethanol distinguished itself

from other ethanol producers by its ability to develop and optimize "biomass" as the substantial

raw material for ethanol production, as well as corn, the more traditional raw material used in

ethanol production. Biomass is generally post-industrial food or paper production waste, which

has no cost (or even negative cost), it is available locally in markets where demand for ethanol is

already high and it does not require the use of additional valuable resources or energy for its

production .

18 . Defendant CHRISTOPHER D'ARNAUD-TAYLOR ("Taylor") was, during the

Class Period, Chairman, Chief' Executive Officer and President of the Company . Defendant

Taylor remained in these positions until his unscheduled termination in late August 2006 .

During the Class Period, defendant Taylor signed and certified the Company's SEC filings,

including but not limited to Xethanol's 1701"€l1 10-QSB and Form 10-KSB During the Class

Period, defendant Taylor also sold over $1 .36 million of his personally held Xethanol shares

while in possession of material false and misleading information about the Company - -

including the fact that defendant Taylor had fabricated significant work experience, he had

misrepresented his leadership skills and management abilities and he had lied on his resu€ne .

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19, Defendant JEFFERY S. LANGBERG ("Langberg'') was, during the Clas s

Period, a director at the Company . During the Class Period, defendant Langberg signed th e

Company's SEC filings, including but not limited to Xethanol's Form 10-K . During the Clas s

Period, defendant Lanberg also sold over, $1 .41 million of his personally-held Xethanol share s

while in possession of material false and misleading information about the Company .

20 Defendant LAWRENCE S. BELLONE ("Bellone") was, during the Class

Period, Chief Financial Officer since April S, 2005, During the Class Period, defendant Bellon e

signed the Company's SEC filings, including but not limited to Xethanol's Form 10-QSB an d

Forum 10-KSB .

21 . The defendants referenced above in 111 18 - 20 are referred to herein as th e

"Individual Defendants, "

22. Because of the Individual Defendants' positions with the Company, they ha d

access to the adverse undisclosed inf©nination about its business , operations, products ,

operational trends, financial statements, markets and present and future business prospects via

access to internal corporate documents (including the Company's operating plans, budgets an d

1"brecasts and reports of actual operations compared thereto), conversations and connections with

other corporate officers and employees, attendance at management and Board of Director s

meetings and committees thereof and via reports and other information provided to them i n

connection therewith

23 . It is appropriate to treat the Individual Defendants as a group for pleading

purposes and to presume that the false, misleading and incomplete infor€-nation conveyed in th e

Company's public filings. press releases and other publications as alleged herein are the

collective actions of the narrowly-defined group of defendants identified above . Each of the

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above officers of Xethanol, by virtue of their high-level positions with the Company, directl y

participated in the management of the Company, was directly involved in the day-to-day

operations of the Company at the highest levels and was privy to confidential proprietary

information concerning the Company and its business, operations, products, growth, financial

statements, and financial condition, as alleged herein . Said defendants were involved in drafting .

producing, reviewing and/or disseminating the false and misleading statements and informatio n

alleged herein, were aware, or recklessly disregarded, that the false and misleading statement s

were being issued regarding the Company, and approved or ratified these statements , in violation

of the federal securities laws

24, As officers and controlling persons of a publicly-held company whose commo n

stock was. and is, registered with the SEC pursuant to the Exchange Act, and was traded on th e

American Stock Exchange (the "AMEX"), and gove rned by the provisions of the federal

securities laws, the Individual Defendants each had a duty to disseminate promptly, accurate an d

truthful information with respect to the Co€npany's financial condition and performance, growth ,

operations . financial statements. business . products, markets, management, earnings and presen t

and future business prospects. and to correct any previously-issued statements that had becom e

materially misleading or untrue, so that the market price of the Company's publicly-trade d

common stock would be based Upon truthlu€l and accurate information .. The Individua l

Defendants' misrepresentations and omissions during the Class Period violated these specifi c

requirements and obligations .

25 The Individual Defendants participated in the drafting, preparation, and/o r

approval of the various public and shareholder and investor reports and other communication s

complained of herein and were aware of or recklessly disregarded, the misstatements containe d

9

therein and omissions therefrom, and were aware of their materially false and misleading nature .

Because of their Board membership and/or executive and managerial positions with Xethanol ,

each of the Individual Defendants had access to the adverse undisclosed information abou t

Xethanol's business prospects and financial condition and performance as particularized herei n

and knew (or recklessly disregarded) that these adverse facts rendered the positiv e

representations made by or about Xethanol and its business issued or adopted by the Compan y

materially false and misleading .

26 . The Individual Defendants, because of their positions of control and authority as

officers and/or directors of the Company, were able to and did control the content of the various

SEC filings, press releases and other public statements pertaining to the Company during the

Class Period . Each Individual Defendant was provided with copies of the documents allege d

herein to be misleading prior to or shortly after their issuance and/or had the ability and/or

opportunity to prevent their issuance or cause them to be corrected . Accordingly , each of th e

Individual Defendants is responsible for the accuracy of the public reports and releases detaile d

herein and is therefore primarily liable for the representations contained therein .

27 .. Each of the defendants is liable as a participant in a fraudulent scheme and cours e

of business that operated as a fraud or deceit on purchasers of Xethanol common stock b y

disseminating materially false and misleading statements and/or concealing material adverse

facts . The scheme enabled defendants to : (i) artificially inflate the price of Company shares; (ii )

register for sale with the SEC, millions of shares of Company stock . held by insiders and/or

defendants and also allowed the Company to raise over $45 million in private equity while i n

possession of material adverse non-public information about the Company ; (iii) allow certai n

insiders, including defendants Taylor and Langberg , to liquidate millions of dollars of thei r

10

personally-held Xethanol shares also while in possession of material adverse non-publi c

information about the Company ; and (iv) caused investors to purchase or acquire shares of

Xethanol at artificially inflated prices .

PLAINTIFF'S CLASS ACTION ALLEGATION S

28 . Plaintiff brings this action as a class action pursuant to Federal Rule of Civi l

Procedure 23(a) and (b)(3) on behalf' of a Class, consisting of all those who purchased o f

otherwise acquired the common stock of' Xethanol between January 31, 2006 and August 8 ,

2006, inclusive (the "Class") and who were damaged thereby Excluded from the Class ar e

defendants, the officers and directors of the Company, at all relevant times, members of thei r

immediate families and their legal representatives . heirs, successors or assigns and any entity i n

which defendants have or had a controlling interest .

29. The members of the Class are so numerous that joinder of all members is

impracticable . Throughout the Class Period, Xethanol common shares were actively traded o n

the AMEX. As of March 24. 2006, the Company had over 16 .167 million shares of common

stock issued and outstanding . While the exact number of Class members is unknown to plaintif f

at this time and can only be ascertained through appropriate discovery, plaintiff believes tha t

there are hundreds or thousands of members in the proposed Class, Record owners and othe r

members of the Class may be identified from records maintained by Xethanol o its transfe r

agent and may be notified of the pendency of this action by mail . using the form of notice simila r

to that customarily used in securities class actions ..

30 . Plaintiff's claims are typical of the claims of the members of the Class as al l

members of the Class are similarly affected by defendants' wrongful conduct in violation o f

federal law that is complained of herein .

31 . Plaintiff will fairly and adequately protect the interests of the members of th e

Class and has retained counsel competent and experienced in class and securities litigation .

32 . Common questions of law and fact exist as to all members of the Class and

predominate over any questions solely affecting individual members of the Class . Among the

questions of law and fact common to the Class are :

(a) whether the federal securities laws were violated by defendants' acts a s

alleged herein ;

(b) whether statements made by defendants to the investing public during th e

Class Period misrepresented material facts about the business, operations and management o f

Xethanol . and

(c) to what extent the members of the Class have sustained damages and th e

proper measure of damages .

33. A class action is superior to all other available methods f'or the fair and efficient

adjudication o[ this controversy since,joinder of all members is impracticable Furthermore, a s

the damages suffered by individual Class members may be relatively small, the expense an d

burden of individual litigation make it impossible for members of the Class to individually

redress the wrongs done to them . There will be no difficulty in the management of this action as

a class action ..

SUBSTANTIVE ALLEGATIONS

Background to the Class Period

.34 The Company . Both prior to and during the Class Period, Xethanol portraye d

itself to investors as an early-stage hiornass ethanol production company, that utilized a busines s

model predicated upon the traditional production of ethanol from corn while commercializin g

biomass to ethano l production .. Thus_ as the Company purported to sustain itself on revenue s

12

produced from traditional corn ethanol production, with the money raised from both public an d

private investors, defendants consistently stated that Xethanol was entering its second phase o f

development and would be able to commercialize biomass ethanol production in the immediat e

near-term ,

35 .. Moreover, the Company repeatedly promoted the benefits of its biomass ethano l

production technologies as being far superior to traditional, coal, ethanol production an d

conditioned investors to believe that Xethanol already possessed the skills and abilities to

commercialize biomass ethanol production in the very-near term . At all times, X.ethanol

consistently stated that its ethanol growth strategy encompassed a three-pronged approach,

ultimately geared to the production of local biomass produced ethanol . This approach i s

summarized in the Company's SEC filings, as €ollows :

Increase production capacity at our Iowa facilities through the physicalexpansion of these facilities utilizing cutting-edge engineering design aswell as integration of our processing technologies ,

Employ a regional approach to building new ethanol production by

focusing on port sites and coastal urban areas on the Atlantic and Gulf

coasts. By creating a regional alliance strategy we will combineXethanol's ethanol expertise with local capital, Truman resources and

project development skills to penetrate coastal markets presently being

served by "impor.ts" 1:rorn the Corn Belt, and

Employ a sector strategy to expansion by focusing on the forests productsindustry, a prolific provider of biornass waste streams and an area wherewe believe we have significant technological advantages . .

~6. Throughout the Class Period, the Company purported to own and operate tw o

ethanol plants in Iowa - Xethanol BioFuels in Blairstown and Permeate Reining in Hopkinton .

Regarding these plants, the Company's SEC filings also stated . in part . that :

ff/e also mvii several proprietary b o-e.vtr'action, bio-separation and bio-ferrrrerrtation teclrnologie.s that ar°e targeted at reducing costs throughout th e

l3

entire ethanol production process as well as enabling the conversion of biomassto ethanol tuarl .%ylitol.

Xethanol BioFuels was acquired in November 2004 as an idled plant . During thefirst six months of 2005 . this facility underwent substantial refurbishme nt andbecame operational in July 2005 . This is a corn--based operation with an initialproduction capacity of 5 , 5 millions gallons of ethanol per year . After initialdiscussions with The Harris Group , our "owner's engi neering" firm, we are nowevaluating contractor proposals to increase the plant productio n capacity to 25million gallons and at the same time optimize efficiency . The BioFuels facility islocated on a 25 acre site with ample space for expansion .

Permeate was initially designed to process waste starches and Sugars and has a

production capacity of 1 .6 million gallons of ethanol per year . In April 200.5, we

temporarily ceased operations at the Permeate Refining plant in order, to

refurbish the .facility and evaluate strategic alternatives. We are currently

evaluating a project to convert Permeate irtto one of thefirst US commercial

cellulosic biomass to ethanol facilities.

37. At or about the inception of the Class Period, defendants also reported that

Xethanol had formed joint ventures to expand ethanol production locally . The annoLine enment o f

these joint ventures was critical to investors because they represented the Company's firs t

regional strategic alliances, formed to develop and execute business opportunities in both th e

Southeast and New England regions These joint ventures also represented critical milestones i n

the Company's evolution, because Xethanol's ultimate goal was to produce ethanol fro m

biomass using local waste streams . Thr€s. the announcements of these types of joint venture s

served to support investors' belief that the Company was operating according to plan, and wa s

already reaching its second stage of"development - - the commercialization of biomass to ethano l

production .

.38 .. The Co€1mpany's website clearly states the competitive advantages of producin g

ethanol lion bioniass. which is virtually tree for the taking and available everywhere . In fact . a

review of the Company's website clearly distinguishes Xethanol as a biomass ethanol produce r

14

and boldly pronounces the advantage of its business . In this regard the Company's websit e

states, in part , the following :

Take the solution to the waste not the waste to the solutio n

Xethanol Corporation is committed to the production of ethanol and relatedproducts in manufacturing facilities close to the major urban markets for thoseproducts, using locally available raw materials . Xethanol's Business Approachcalls for the use of locally available biomass rather, than corn as the primary rawmaterial For ethanol production .

Xethanol breaks ground on its 35 million gallon a year ethanol facility atBlairstown. IA which is beside its existing plant currently producing 6 5 milliongallons a year,

1 9 Xethanol's website also states that its business approach, using locally produce d

biomass is substantially "better than corn" In this regard, Xethanol's website states that :

Better than corn

Coal is currently the dominant raw material for ethanol production .. As a resultthis production is now concentrated in the Corn Belt - thousands of miles from theareas of highest ethanol demand on the Atlantic . Gulf and Pacific coast s

Use of local waste

Xethanol's Business Approach calls for the use of locally available biomass rather .than corn as the primary raw material for ethanol production . Biomass is organicwaste material and includes everything from wood chips and yard waste, to cornstover and municipal solid waste ..

Cheaper feedstoc k

Biomass of various kinds is abundant in the highh-demand coastal areas . Itsgeneration is widely dispersed, and its value is too low to make transportationviable to a large footprint central processing facility . Because most biomassstreams are now either abandoned or land-filled at the producer's expense,biomass is potentially a significantly cheaper feedstock for ethanol productionthan corn .

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Smaller and Close r

The economics of biomass-to-ethanol production mandate small footprint plants,typically producing between 5 and 25 million gallons a year and located close tothe biomass source .

Lower freight expense, higher margin s

Xethanol plans to locate biorefineries for ethanol fuel production close to high-density urbanized ethanol markets and to reliable biomass sources - so reducingfreight and raw material costs, capturing higher ethanol prices and gaining, thebenefit of unproved margins .

40 .. The statements on the Company's website, reproduced above, existed both prio r

to and throughout the Class Period . In addition to the statements concerning Xethanol' s

intention and ability to convert biomass to ethanol, the other statements made by defendant s

immediately prior to the inception of the Class Period also remained uncorrected and alive, at al l

times during the Class Period .

Defendants' Materially False and MisleadingStatements Made During the Class Perio d

41 . On January 3 1, 2006, the inception of the Class Period, Fortune Small 13rrsines .c

Maga_7irie, a sister publication of Fortune Magazine, featured Xethanol and highlighted th e

"innovative" way in which the Company converted "candy" and other biomass into Xetlranol .

This report stated, in part, the following :

Entrepreneurs tend to stray at least one step ahead of the pack, and lately they

have been ivideizing their lead . Small businesses are generating so much that's

new in our economy that more and more big corporations are buying them up to

gain access to their research and development . With that in mind, rve found a

half -dozen entrepreneurs who have a new idea, business, or invention you're

borond to be hearing about over the next year or sn ,

FILL'ER UP WITH CARAMEL ,

Leftover halloween candy might not seen like fuel for anything but dentalcavities, but Xethanol, a firm based in New York City, may change thatperception .

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Since 200.3, .ethanol has operated two Iowa plants that can cheaply distill agasoline additive called ethanol front bizarre sources such as stale blrtterscotc{rcandty ., When technicians mix the sweets with a special form of yeast,fermentation results, producing ethanol . (Typically producers of ethanol derivethe clean-burning, high-octane fuel from corn) Big oil companies then combine itwith unleaded ;asoli€ze to reduce the cost of has and the air pollution it causes ,

Xethanol isn t just relying oil calmly , for its fuel supply. This year it plans tointroduce a process that will make it possible to turn all ki►lds of things--including cornstalks, grass clippings, and old newspapers --into ethanol. If allgoes as plat ned, 59-year-old CEO and founder Christopher d'Arnaud Traylorprojects revenues of $1S million this year, up from $2.5 million in 2005--andthe first-ever profit for Xethanol, which he started in 2000 and took public lastFebruary . "Where there's muck, there's money," lie quips .

Xethalrol will use a recently discovered forth of yeast to ferment various types ofgarbage into ethanol . It has obtained rights to the process from the U,S .Department of Agriculture, where a scientist discovered that a yeast in theintestines of a type of beetle can convert plant-based waste product into ethanol .

This ,year d'Arnaud-Taylor intends to begin opening plants on the East Coastthat will use ,yeast from the beetles to bre w ethanol from sludge left over frompaper milling. The plants will be able to make in total more tlra ►r 100 milliongallons of ethanol lr year. That's a trickle, considering that Americans burl? nearly

21 million banels of oil every day . But it's a start . Thanks to federal subsidies and

$60-a-barrel oil . it's a seller's market for ethanol . And evert if oil prices drop

below $30 a barrel, Xetha ►rol needn 't €r'orl;y, sate experts. "Relying on cheaper

processes than competitors could help the co111pally rf prices fall," says Anthony

Marchese, president of Monarch Capital Group in New York City . . 1---I phasis

added . 1

42 In addition to the foregoing, in a BTlsine:ss Wire report, dated the sane day, the

Fortune report was hi{glhliglhted, and defendant Taylor added the following comments :

Xethanol Chairman and CEO Christopher d'Arnaud-Taylor commented "It is

most grrrtifyi►rg for our stockholders and employee's that .Xetlranol has been

recognized as an innovator by FORTUNE and , for our Blairsto€vn plant to begi velr such prominence on the cover." Mr d'Arnar€d-Taylor added "There are

strong legislative and commercial tailwinds driving the future of ethanol and our

company. The governn€isent's support for ethanol is likely to receive a further boost

in President Bush's upcoming State of the Union address . Furthermore, the

commitment of Ford Motor Company and General Motors to increasing

production of ethanol enabled Flexible Fuel Vehicles, indicates that .Xethanol is

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aligned wit/i ineeting our Nation's freed ,for energy independence and theproduction of a safe, clean -- burning fuel . [Emphasis added . ]

43 . Following the publication ofthe Fortune report and the Business Wire release

announcing the article and quoting defe ndant Taylor, the price of Xethanol shares rallied an d

trading volume spiked, In fact, shares of the Company traded from approximately $3,20 pe r

share, on volume of 36,000 shares, two trading days before the Forlune report was filed, yet the

day before the Fortune article was made public over 500,000 shares traded as Xethanol stoc k

closed at $390 . The following day, .January 31, 2006, as the Fortune report and press releas e

announcing this report were circulated, shares of the Company traded to a high of almost $6 .00 ,

before closing at $5 .75 as over 1,8 million shares traded .. This trading volume appears to hav e

been greater than the total trading volume of all of the Company's shares from the time Xethano l

stock began trading in March 2005, until that time .

44 . On February 27. 2006, defendants published a release on PR NervSw ire

announcing that Xethanol had selected a stock promotion company named Zangani to furthe r

expose the Company to the investor community via webcasts and podcasting ; as well as all

"Investor Portal" designed to -communicate Xethanol's vision" to a broader audience . This

release also stated, in part, the following :

Xethanol Corporation, a biotechnology driven ethanol production company,

announced today that is has retained Zangani to help further develop future

business plans . licensing deals . international exposure and investor community

communications .

Z..angani will produce and webcast company presentation s, CEO interviews andQ&A forums with their established investor community, "The point of thisprogramming will allow us to help Xethanol take advantage of new r €ediaopportunities which enhance their other communication vehicles ," said Leonardo7.angani, founder- and President of Z.angan

i"All presentations and interviews will, be produced and uploaded to the Zangan iInvestor Cone unity on the same day to allow for immediate dynamic interactio n

18

between Xethanol and our community with Zangani being the conduit for thatinformation," stated Kevin Nally, business development consultant and moderatorfor the Zangani Investor Community

Mr Christopher d'Arnaud-Taylor, Chairman and CEO of .Xethatrol,

contrrtertted "We are very excited by the opportunity to team with Zangani to

leverage their new media skills and spread the Xethanol message to a twirler

investor audience, especially the European business development opportunities

drat Zangani can open up to its ".

Podcasting is a method of publishing and distributing audio files via the Internet .Podcasts can be listened to directly from a computer or downloaded to a portablemedia player, such as Apple's iPod .. [Emphasis added . 1

45 . The same day , Februar y 27, 2006, Stock uru con? also published a release on M 2

Presswire reporting the following :

Xetlrarrol Corporation 's goal is to be the leader in the emerging biomass-to-

ethanol industr i'. Xetlranol's mission is to optimize the use of biorrrass in the

renewable, energy field and convert biomass that is currently being abandoned

or land .filled into ethanol and other valuable co products, especially x ?litol,

Xethanol's strategy is to deploy proprietary bioteciwelegie.s that will extract crjrd

ferment the sugars trapped in these biomass waste concentrations . Xethanol's

strategic value proposition is to produce ethanol and valuable co-products cost

effectively with ethanol plants located closer to biomass sources . In Iowa,

Xeflzanol owns two ethanol production ,facilities, where it is deploying these

technologies . For more information about Xethanol, please visit its website at

http://\vrw~,sf .xetlianol .co€mm .. [Emphasis added .,

46. The news reiterating that the Company was currently exploiting biomass to

ethanol production at its two plants. as well as the news that Xethanol had hired a stoc k

promotions firm also had the effect of propelling its shares higher . Acco€°dingly, on February 27 ,

2006, shares of the Company rallied over $1 00 per share to close at $6 .60 per share . on tradin g

volume of .just under I million shares

47, On March a 1, 2006, defendants Bled with the SEC, the Company's year end 200 5

animal report, pursuant to Form 10-KSB In addition to reiterating many of the same materiall y

19

false and misleading statements as had been published by defendants previously, at that time, the

2005 Form 10-KSB described Xethanol to investors, in part, as follows :

Xethanol Corporation (the "Corarparry") is a biotechnology-driven company inthe emerging biomasswta-etlrrrrrof indr{ ..str y . The Company produces ethanol and

its co-products . Ethanol is a clean burning, renewable fuel and is used as a

primary gasoline additive under the Energy Policy Act of 2005,. The Company

plans to optimize the use of biomass in the renewable energy field and convert

biomass that is currently being abandoned or land filled into ethanol or other

valuable co fprodrrcts. The Company's business model is to deploy proprietary

biotech no/ogles that will extract and ferment sugar's trapped in these biomasswaste concentrations in a cost effective manner' by locating ethanol plants

closer to biomass sources and in pro.rrrrrity to urbanized high-derrrand ethanol

markets ..

The Company was originally incorporated on January 24, 2000 in Delaware as

Freereal-Ti€rrequote .com, Inc . On August 8, 2000, the Company changed its name

from Freereal-Timequote .corn, Inc . to LondonManhattawcom, Inc_ ("London

Manhattan") . On September 19, 2001, LondonManhattan changed its name to

Xethanol Corporation, to function as a holding and management company for aseries of planned acquisitions and new ventures in the biornass-to-ethanol

industry . [Emphasis added ..]

48 . The 2005 Form 10-K also described the history of the formation of the Compa€1

yA review of these statements reveals that Xethanol was not formed traditionally by following al l

SEC filing requirements but . rather. the Company was formed on or about February 2, 2005 ,

through a so-called "reverse merger" transaction with a registered "shell" corporation . In effect,

Xethanol and a registered corporation named Zen Pottery Equipment, Inc ., based in Colorado,

merged through an entity called Zen Acquisition Corp ., a Delaware corporatio€1 . Ultimately, Ze n

Acquisition Corp . was merged with and into Xethanol Corp .

49 .. As a result of this reverse merger, the Company issued 9 .706 million shares o f

common stock to the former stockholders of Xetha€iol representing 74 .0% of the Company' s

outstanding common stock . In connection with that merger, the Company also completed th e

closing of a private offering of a total of 1 19 million shares of co€nmon stock at a purchase pric e

20

of $3 .25 per share to accredited investors, . Gross proceeds from the initial closing of the privat e

offering were slightly over $3 .0 €nifio€z,. The Company also received an additional $867,84 9

upon a second closing of the private offering on February 15, 2005, for total private offering

proceeds of $3 ..867 million ,

50 .. After, the closing of the merger and the closing of the private offering, th e

Company reported that it had a total of 13 .437 million shares of common stock and warrants t o

purchase 1 .293 million shares of common stock .. The Company's 2005 Form 10-KSB did not ,

however, disclose who the owners of these shares were, or describe the Company's curren t

relationships with its early stage investors .

51 . Consistent with del-endants' prior representations, the 2005 Form 10-K.SB again

reported that Methanol then owned and operated two ethanol production facilities in Iowa . One

of these two facilities was referred to as Permeate Refining . file . located at Hopkinton, Iowa .

Primarily a corn to ethanol producing plant, operations at the Permeate Reining plant wer e

"temporarily" halted in April 2005 . purportedly so that it could be "refurbished,'" upgraded and

expanded . In this regard, the Form I O-K stated the following :

In April 2005, the Company temporarily ceased operations at Permeate in order

to refurbish the facility and to consider alternatives to maximize the strategic useof the facilit y. The Company is currently evaluating the possibility of utilizing the

Facility initially as it pilot plant for commercializing certain of its teclrjrologie :sand ultimately scaling up the 111614V once the technology proves out.

With regard to our Permeate facility, we are currentlt7 evaluating a plan toadapt Permeate to become a ,full prod uction cellulo sic bivrrta :ss to ethanol

facility. Under this plan , we si'oulrl use local industrial biorraas.s waste streains as

our feedstock . We would convert these waste streams utilizing certain of our front

end processing technologies . I he Permeate facility is ideally designed for this

project .. It is anticipated that the facility could quickly ramp LIP from 1 .6 million

gallons per year to 4 millions gallons Per year . A few of the very attractive aspectsof this project are 1) it is expected that any required physical plant alteratio n

71

would he relatively minor and could be accomplished ivitlrin 6 months, 2) it willbe our first cellulosic biomass facility and a proving ground ,for ourtechnologies, and 3) it will increase of overall production levels andprofitability.

Permeate Refining was initially designed to process waste starches and sugars and

has a production capacity of 1 .6 million gallons of ethanol per year . In April

2005 , we temporarily ceased operations at the Permeate Refining plant in order to

refurbish the facility and evaluate strategic alternatives . We are currently

evaluating a project to convert Permeate into one of the first US commercial

cellulosic biomass to ethanol facilities . We are pursuing a plan combining steam

gun explosion technology with our proprietary Virginia Tech fermentation

technolot y . Under this plan, Permeate production capacity could be increased

s g►1ff cantly w tli enhanced operating efficiency. [Emphasis added ..]

52 . The statements concerning the Company's intentions to refurbish the Hopkinto n

plant were also critical to investors because , during the fourth quarter of the prior year ,

defendants had charged over $3 .635 m illion to expenses representing the unamortized cost of

acquiring license agreements, after considering the uncertainties surrounding the tinting of

their commercialization The technologies relating to that write-down primarily related to

technology then recently-acquired for stock, through UTEK, and included the following :

Advanced Bioethanol Technolog ies, Inc .

On .June 29 , 2004, the Company acquired 100% of the issued and outstandingcommon stock of 'Advanced Bioeth anol Technologies , Inc . ("ABTI') from,:

UTEK Corporation in exchange for 200,000 shares of the Compan y's common

stock tit a price of$1.50 f it fl total consideration of $300,000. ABTI's principal

asset is a license agreement, which has a termer of twenty-one years . to a biomass

extraction and fermentation process developed at Virginia Polytechnic Institute

and State University ("Virginia Tech") This technology conve rts waste hionnassmixtures to ethanol by exploiting each mixture's unique properties to solvefeedstock-specific processing problents . The license calls for minimum royalty

payments of $7.500 in year three, $15,000 in year four and $30,000 in year rive

and each year thereafter until the end of the license term .

On Decembe r 6, 2005, the company entered into a research agreemen t xvith

Virginia Tech for the further developme nt 1111!1 eventual commercialization of

the licensed technology Under this agreement . the Company will pay Virginia

Tech $75,649 in five payments scheduled over the course of 2006 .

?2

Ethanol Extraction Technologies, Inc .

On September .30, 2004 the company acquired 100% of the issued andoutstanding common stock of Ethanol Extraction Technologies, Inc. ("EETI")

fi•oirr UTEK Corporation in exchange for 169,230 shares of 'the Company'scommon stock at a price of $3.25,for a total consideration of $5.50,000 .. EF:rI

holds a license agree€nent, which has a term of ten years, to a patented, Queens

University, Ontario, (developed extractive fermnentation teel:nolob~J1 to contlnilallyremove and isolate ctlrairol during the fermentation process, irrcotporatrn; a

strategy in which the fermentation reaction and ethanol removal occur

sinmltaneously, thereby increasing output and reducing energy costs. Under the

license agreement, the Company is obligated to pay an annual earned royalty of

1 1/0 of net sales of licensed product prior to patent expiration and 0 ..25% thereafter

plus 1% of net sales of equipment that enables the use of the licensed technology,for the term of the agreement.. The license also calls for a one-time milestone

payment of $2,500 per million gallons of nameplate capacity for each plant set up

during the term of the agreement ..

Superior Separation Technologies, Inc .

On January 11, 200.5 the Company acquired 100% of the issued andoutstanding common stock of Superior Separation Technologices, Inc. ("SSTI'9from UTEK Corporation in exchange for 2.50,000 shares of the Company'scommon stock at a price of $.3 .25 .for a total consideration of $812,500 . Thenumber of shares issued was subsequently adjusted to 220,702 shares to reflectthe effects of the reverse merger, . SSTI holds a license agreement . which has aterm of twenty years, to a patented technology developed at the U .S . Departmentof 1=ne€gy's National Renewable Ever }' Laboratory designed to effectivelyseparate liAnocellulosic material into lignin, cellulose and dissolved sugars . Thelicense calls for minimum royalty payments of $10,000 in 2007, $25 .000 in 2008and $50,000 in 2009 and each successive year thereafter until the end of thelicense term .

Xylose Technolog ies, Inc .

On 4ugust 1 .5, 200 .5 the Company acquired 100% of'/he issued and outstanding

common stock of Xvlose Technologies, Inc. (",YT!") fi°onr UTEK Corporation

in exclran ,;e for 567,857 shares of the Company's common stock at a price of

$4. 20 for a total consideration of $x, .38.5,000 . XTI holds a license agreement,

which has a teal of twenty years . to patented technologies based on research done

by the U . S . Department of, Agriculture's Forest Products Lab (the "FPL")rle.siglrerl to convert ...ylo,se into ethanol and .xjlitol . The license calls for a

minimum royalty payment of $15,000 in 2008 and $5,000 in 2009 and each

successive year thereafter until the end of the license term . At the time of the

acquisition. XIl also held cash of $450,000 .

.2J

On November 30, 2005, XTI entered into a Collaborative Research andDevelopment Agreement ("CRADA") with the FPL, for the purpose of developinggenetically engineered yeast strains for the production of xylitol from cellulosicbior ass, such as wood chips, Under the CRADA . XTI will fund to FPL $250,000over the course of 2006 . The first payment of $62,500 was made in January 2006,[Emphasis added .]

5 3 . Regarding the Company's strategy of producing ethanol from biomass, the 200 5

Form I0-KSB contained many statements that were substantially similar to those contained o n

the Company' s Internet website concerning Xethanol's foreseeable growth through th e

commercialization of biomass ethanol . These statements include . in part, the following :

Iowa Expansion Strategy

Under the first prong of our business and growth strategy we plan to take

advantage of our BioFuels facility which is located on 25 acres of land with

nearby corn and biomass production as well as strong local civic and business

relationships with all required permits already in place . After consideration andconsultation with Harris Group, our process engineering firm, we are

,fot{rrrrrlatirtg a plan to expand the BioFuels ,facility from approximately 6million gallon per ,year tip to 2 .5 million gallons per t>ear•. Our expansion plait

envisions state-of-the- art engineering design and equipment and the integrationof cutting edge processin technologies .. We believe this expansion, will optimize

our investment in the facility and significantly increase profitability. We are

currently evaluating contractor proposals . Of particular significance in this plan is

our ability to continue to operate the plant with minimal disruptions during the

expansion

:,: :, :

Regional Co-Location Strategy

Under the second pron of our business and growth strategy , we intend to build

ethanol prorltrctiomt frtcilities co-located w ith , or in pr°oxinzity to, ivastefeedstock

generators in the major ethanol usage areas clustered on the Atlantic and Gulf

Coasts, To date, ethanol production has been concentrated in the corn J-_ rInmirng

states in the Midwest since corn is presently the major feedstock in ethanol

production. However, ethanol buyers are clustered on the East and West Coasts

around major trans-shipment points such as ports .. We intend to partner with local

entities that have real estate and tanker 5 tor°age facilities available at thesetrarrs-shipment points and use their facilities to build local ethanol production.facilities with a lower capital outlay on our part. We intend to irtrplement

24

proprieta,y bio--separation and bio ferrrrerrtation technologies at these coastalfacilities that will allow its to use local biomass waste streams, such asindustrial . food processing wastes, in ethanol production . Our aim is to becomea low-cost ethanol producer at major coastal trams-shipment points, and thusbecome the ethanol supplier of choice, for large, local users . [Emphasis added . ]

54 . In addition to critical statements about the viability and comnlercialibility of th e

Company's technologies, the 2005 Fora 10-KSB also provided statements that purported t o

reveal transactions that had occurred between the Company and any parties related to th e

Company . To investors these statements were also critical .

55 . In f ct, because of theunique position of Xethanol as a shell registration , early-

phase experimental technology company and because of the untested nature of Xethanol' s

biomass to ethanol processes, it was critical to investors to know any and all relations betwee n

the Company and third parties - - primarily because these relationships could weigh on th e

impartiality of any transactions, and they could impact the risks of loss and the risks tha t

valuations were not as independent as they may otherwise have appeared .

56. Accordingly. because Related Party Transactions were inexorably tied to

valuation and risk analysis, the 2005 Form 10-KSB reported, in part, the iollowina :

NOTE 14. RELATED PARTY TRANSACTION S

On January 1, 2003, the Company renegotiated an existing management services

agreement with LondonManha ttan Limited , Inc. (`:LML") for the services of

Christopher d'Arnaud-Taylor as its President and Chief Executive Officer (tile

:`2005 Agreement") . Mr., d'Arnarud-Taylor is the owner of LMI_ :, a significant

shareholder of the Company and the Company's Chairman oS the Board of

directors . Under this arrangement, the Company agreed to pay LML 1) a

management fee of $10,000 per month Until the first "Project Transaction" . as

defined below, closed, $12 .000 per month fironn such date to the closing of the

second Project Transaction, and $15 .000 per a month, thereafter, 2) an incentive

bonus of $50,000 upon closing of the first Project Transaction $100 .000 upon

closing of each subsequent Project Transaction and 3) $100,000 in frill

satisfaction for all management and/or other services previously rendered to the

Company tinder previous agreements that remained unpaid and outstanding as o f

?5

December 31, 2002 . . . . . During 2004, the Company made total payments to Mr .d'Arnaud-Taylor of $216,275 .

In January 200.5, the Company terminated its arr•an;enrent with L14' L andentered into an employment agreement directly with Mr. (!'Arnaud Taylor asthe Company's President and Chief Executive Officer for, a term of three years(the "2005 Agreement") . Under the 2005 Agreement, the Company pays AIrd'Arnarrrl-Tayy1or a monthly fee of $1 .5,000. During 200 .5, the Company madetotal payments to Mr. d'Arnaud Tai>lor • of $281,075.

On January 1, 2003, the Company entered into for lmal consulting servicesagreement with Jeffrey Lanaberg & Associa tes ("Langberg") . Langberg is asignificant shareholder of the Company and became a member of the Board ofdirectors in 2005 Under this agree€ lent, the Company agreed to pay Langberg 1)consulting fees at the rate of 110,000 per, inorith until such time as the first ProjectTransaction closes, at the rate of $12 .000 per, €month from such date to the closingof the second Project Transaction, and at the rate oi`$15,000 per month thereafter,2) an incentive bonus of $50,000 upon closing of the first Project Transaction and$100,000 upon closing of each subsequent Project Transaction thereafter, and 3) afinder's fee for the gross proceeds from the sale of securities to investorsintroduced to the Company and 4) $100,000 in full satisfaction for all consultingandlor other services previously rendered and not paid by the Company . During2004. the Company made total payments to Lanaberg of $334,525 includingfinder's fees of $145,025 which were recorded as a reduction to Additional paid-in-capital .

In February 2005 . the Company re -negotiated its consulting services agreementwith Langberg, pursuant to which Mr . Lar€gberg agreed to provide generalbusiness advisory services to the Company .. Under this agreement, the Companyagreed to pay Mr ., Langberg a consulting fee of $15 .000 per month and a$225,000 sign-on bonus . Mr . Langberg is also eligible to receive performancesbonuses at the discretion of the Board of directors .. Mr. L.angber'g agreed to waiveany compensation otherwise payable to him as a director of the Company, During2005 . the Company made total payments to Langberg of $649,147 .

In October 2004, the Company began sharing office space in New York City withother affiliated companies under a sublease with Xethanol Management Services .LLC ( : :XMS") which is a single member LLC controlled by Mr . Langberg, Underthis arrangement . Xethanol is currently paying approximately $10,400 per €zmonth,plus reimbursement of other costs . in sublease payments on a month to monthbasis . As of December, .3 1, 2005 total payments made were $99,806 . .

,I * Dl~

26

ITEM 12, CERTAIN RELATIONSHIPS AND RELATED TRANSACTION S

Management and Consulting Services Agreement s

In September 2001 . Old Xethanol entered into a Management ServicesAgreement with London Manhattan Limited, Inc ., a corporation controlled byChristopher dArnaud-Taylor, our Chairman and Chief Executive Officer, for thesenior corporate management services of Mr . d'Arnaud-Taylor as its President ..Pursuant to this agree€nent . Old Xethanol agreed to pay London ManhattanLimited, Inc, a monthly management fee, an incentive bonus based on the closingof project transactions and a percentage of our earnings before interest,depreciation and amortization . In connection with the reverse merger and privateoffering, we and London Manhattan Limited . Inc . agreed to terminate theManagement Services Agreement, with no further liability or obligation on thepart of the parties (except for certain carried, accrued fees), of ective as of theclosing of such transactions . Mr . d'Arnaud-Taylor entered into an employmentagreement directly with Lis ., as described in "Item 10 . Executive Compensation -Employment Agreements . "

In January 2003, Old Xethanol entered into a Consulting Services Agreementwith Jeffley Langberg & Associates, pursuant to which .Jeffrey S . L.angberg. nowone of our directors, provided business advisory services .. Under this agreement .Old Xethanol had agreed to pay Jeffrey Langberg & Associates a monthlyconsulting fee, an incentive bonus based on the closing ofprooject transactions anda fee for introductions to investors .. In connection with the reverse merger andprivate offering, we and Jeffrey Langberg & Associates agreed to terminate theConsulting Services Agreement, with no further liability or obligation on the partof the parties or of us (excel-it for certain earned, accrued fees), effective as of theclosing of such transactions . Under the January 7-003 a<greement, we recordedconsulting fees to Mr ,an-berg of $389,025 in 2004 and %246 .270 in 200")

In February 2005 . we entered into a Consulting Services Agreement with Mi .Lan berg, pursuant. to which Mr. L.an~gber`~ agreed to provide general businessadvisory services . Under this agreement, we agreed to pay Mr .. Langberg amonthly consulting fee of $15,000 per month and a si`gn-on bonus of $225,000Mr. Langber; is also eligible to receive performances bonuses at the discretion ofthe Board of directors as well as equity-based awards under the 2005 Plan . Mr .Langberg agreed to waive any compensation otherwise payable to him as adirector of our company . During 2005 . we recorded total consulting fees to Mr ..Langberg of $455 .000 .

57 . The 2005 Form 10-KSB also reported that the Company maintained a purporte d

system of internal controls and procedures that were designed to assure that defendants '

Z7

statements about Xethanol were true accurate and correct .. Accordingly, the Form 10-KSB also

stated, in part, the following :

ITEM 8A. CONTROLS AND PROCEDURE S

Disclosure controls and procedures are our controls and other, procedures that are

designed to ensure that information required to be disclosed by us in the reports

that we file or submit under the Exchange Act, is recorded, processed,summarized and reported, within the time Periods specified in the SEC's rules and

forams . . Disclosure controls and procedures include, without limitation, controlsand prrocedur { es designed to ensure that information required to be disclosed blyus in the reports that we file under the Exchange Act is accumulated andcommunicated to our nrana ,;erllelrt, including principal executive officer and

principal financial officer, rrs appropriate, to allow tilrrely decisions regardingrequired disclosure.

Our Chief Executive Officer and Chief Financial Officer have evaluated the

effectiveness of the design and operation of our, disclosure controls and

procedures as of the end of the period covered by this report, The evaluationprocess, including the inherent limitations on the effectiveness of such controls

and procedures, is more fully discussed below . Based upon our evaluation of theeffectnvenes .s of the design and operation of our disclosm-e controls andprocedur es, our Chief Executive Office!' and Chief Financial Officer have

concluded that as of the end of the period covered by this report,notwithstandin the prior existence of certain material weaknesses, our01disclosure controls and procedu res were effective-

Prior to Old Xethanol's "reverse merger" transaction with Zen in February 2005,during which time the foregoing errors in financial reporting were made, Old

Xethanol had no lOrm-nal audit committee . very limited accounting personnel and

outsorUced significant accounting Functions . Reliance on such Iimited resources

impaired Old Xethanol's ability to provide for segregation of duties and the

ability to ensure consistently complete and accurate financial reporting, as well aseffective disclosure controls and procedure s

The material weaknesses were discussed in detail among management and ourcurrent independent registered public accounting firm in the first quarter of .2005and, as a result of such discussionns , we prollrptlt> implemented a series of steps to

improve our financial reporting and disclosure controls and procedure's and to

remedy the material iveakne.sses identified. Such steps included putting in place

personnel, processes, technology and other resources appropriate to support our

financial reporting and disclosure controls and procedures . In this regard, we (I)

appointed a chief financial officer, with financial accounting and Exchange Ac t

29

reporting experience, in April 2005 to oversee all of our accounting and reportingfunctions, (2) consolidated all of our, plant accounting, reporting andadministrative functions at our Xethanol BioFuels facility under a local plantcontroller, (3) implemented a system of formal procedures and controls to enablethe accurate and timely gathering, recording, processing and "up-the-ladder"reporting of information, including formal monthly reporting requirements andregular conferences among internal accounting personnel and senior financialmanagement, (4) consolidated all public reporting functions at our principalexecutive offices under the supervision of our Chief Financial Officer, and (5) onJuly 28, 2005, formed an audit committee of the board of directors composedentirely ofindependent directors

Because all of the foregoin steps were implemented by our company prior to

the end of the period covered by this report , our Chief Executive Officer andChief 'Financial Officer were able to carefully evaluate the effectiveness ofthese new measures, together with our other disclosure controls andproc edures, at the end of the period covered by this report. On the basis of suchevaluation. our Chief Executive Officer and Chief Financial Officer reached theconclusion set forth above that, as of the end of the period covered by this report,notwithstanding the prior existence of certain material weaknesses-, ourdisclosure controls and procedures were effective . . . [Emphasis added .. ]

58 Again, because of the experimental nature of much of the Company' s

technologies, the skills and abilities of the Company's officer's and directors were of critica l

importance to €nvestors .. Thus. in addition to the foregoing , the 2005 Form 10-KSB described

the Company's key officers and directors, in part, as mallows :

Christopher d 'Arnaud-Taylor . Chairman . President and Chief Executive

Officer, has worked with Old Xethanol since August 2000 . He became our

Chairman, President and Chief Executive Officer on February 2, 2005 He is all

international merchant banker and entrepreneur who gained global senior

corporate executive experience with multinationals includin Unilever, Reed

Elsevier, Northrop Grumman and TKM Trading . He has directed the strategy,

operations acrd , fnancral gffnirs of companies in the United States, Europe,

Africa, the Middle East and Asia and managed the development and execution

of corporate turnarounds and entrepreneurial ventures worldwide Mr .

d'Arnaud-Taylor has been a Director and President of a private merchant banking

firm. London Manhattan Securities . Inc .., for more than the past five years .

London Manhattan has worked with entrepreneurs and established companies in

forging new enterprises and realizing the potential of established businesses

through mergers and acquisitions, ..joint ventures and strategic alliances . London

Manhattan has participated as managing co-venturer in special situations whereits direct involvement led to improving the operating results and strategic fhcus o f

2g

an underperforming company or new business venture . Mr. d'Ar gaud-Taylor also

presently serves as a director of Metamorphix Global Inc, a developer of

advanced precast concrete technology that ernulates the patterns of natural stone,

and Xerninex, Inc., an early-stage producer of lead and zinc concentrates .

Previously, Mr. d'Aniaud-Taylor served as CEO of several global tradingcompanies operating primarily throughout the developing world trading in forest

products, precision equipment and building materials . He has consulted

extensively with leading defense contractors in the USA and Europe on

countertrade and defense offset perform ance .. Mr .. d'Arnaud-Taylor obtained his

M .B .A. from the London Business School having completed additional graduatebusiness studies as an exchange scholar in international finance and development

economics at the Ecole des 1-Iautes Etudes Conmmerciales in Paris, France and

corporate finance at New York University's Stern School of Business .. He

previously studied economics, government and law at the University of Exeter,

England .

Jeffrey S . Lan-berg, Director, became a member of our board of directors onFebruary 28, 2005 . Prior to that, since January 1999, Mr ., Langberg had been afinancial and business development advisor to the Chairman of Old Xethanol ., Formore than the past five years . Mr. Langberg has been an independent investmentbanker and business development advisor to public and privately-held companiesinvolved in a broad range of industries . Mr. L ..angberg currently serves as aninvestment banker and business development advisor to Metarnorphix GlobalInc ., a developer ofd' advanced precast concrete technology that emulates thepatterns of natural stone ; United Energy Corp ., a manufacturer of specialtychemicals For the oil services industry ; Deep Marine Technology, Inc ., a designerof higlh technology single operator submarines for deep sea work ; and 1-lybed FuelSystems . Inc ., a marketer of energy savings technology in the alternative fuelsindustry . Mr. Langberg graduated from the University of Pennsylvania's WhartonSchool of Finance and received a law degree from Fordhani University LawSchool . [During 2005, Xethanol also recorded consulting fees to Langberg of$455,000 and provided health insurance coverage to him at a cost of $14,014 i

Louis B. Bernstein , Director . became a member of our board of directors on JuneZ, 200 .5 . Mr. Bernstein is currently Assistant General Counsel of Pfizer Inc . .where he has been an attorney for 29 years . In this capacity, Mr Bernstein hasmanaged product liability claims and litigation involving prescriptionpharmaceuticals. orthopedic implants and other medical devices . Mr . Bernsteinalso provides due diligence, financial modeling, market research, acquisitioncandidate profiling and strategic partnering advice and assistance to clients in thelife sciences and specialty chemical sectors . In addition, Mr, . Bernstein has relatedexperience in advertising and labeling review, legislative analysis andconsultation regarding new products and investments, food and drug regulatorynatters and commercial transactions .

30

* J; *c

James Stewart , Vice President - Plant Operations and General Manager -Xethanol BioFuels (subsidiary of Xethanol BioEnergy, Inc .) . . Mr. Stewart hasmore than 23 years of experience in ethanol production in the United Statesand throughout the world. In addition to extensive consulting experience, Mr.Stewart has been associated with the ethanol plant in Blairstown , Iowa since itsinception and throughout its operations , including serving as general managerof the plant during its operation from 2000 through 2002 . Mr Stewart hasextensive experience in all aspects of plant operation including regulatory affairs,staffing, engineering, feedstocks and emergency planning . Prior to his work at theXethanol BioFuels plant, Mr, Stewart worked as a plant manager and in technicaladvisory roles at more than ten other ethanol production plants . [Emphasisadded . ]

59, . Again, because the truth and transparency of defendants disclosures an d

omissions were so critical to investors' ability to value and evaluate the Company, the statements

by defendants that purported to attest to the veracity and completeness of these disclosures wer e

also of critical importance Accordingly, the 2005 Form 10-K contained Certifications b y

defendants Taylor and Bellone that stated the following :

Certification of Principal Executive Officer

Required by Exchange Act Rule 1 .3a-14(a)

I . I have reviewed this Annual Report on Form IO-KSB of XethanolCorporation .

~ . Based on no, knollwledge, this report does not contain ally 1111truestatement of a Material fact or omit to state a materialfact necessary to Irllrke

the statenients made, in light of the circumstances under which such( statements

were made, not misleading with respect to the period covered by this report;

3 .. Based on iny linol4ellge, the financial statements, 111111 othe rel-fill all cial

information included in this report, fairly present in all material respects the

financial condition , results of operations and cash flows of the small business

issuer as of, and for, the periods presented in this report;

4 The small business issuer's other certifying officer and I are responsiblefor establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(c) and 15d-I5(e)) and internal control over financialreporting (as defined in Exchange Act Rules l3a-15(f) and 15d-15(f)) for thesmall business issuer and have :

31

(a) designed such disclosure controls and procedures , or caused suchdisclosure controls and procedures to be designed under our supervision , to ensurethat material information relating to the small business issuer , including itsconsolidated subsidiaries . is made known to us by others within those entities,particularly during the period in which this report is being prepared ;

(b) designed such internal control over financial reporting, orcaused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of .financial .statements .for externalpurposes in accordance with generally accepted accounting principles ;

(c) evaluated the effe'ctivene'ss of the sinall business issuer' sdisclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures, as of the endof the period covered b j, this report based on such evaluation ; and

(d) disclosed in this report any change in the small business issuer'sinternal control over financial reporting that occurred during the small businessissuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarterin the case of an annual report) that has materially affected, or, is reaso n ably likelyto materiall y affect, the small business issuer ' s internal control over financial

reporting; and

5 . The small business issuer's other certifying officer and I have disclosed,based on our €i-l ost recent evaluation of internal control over financial reporting, tothe small business issuer's auditors and the audit comm ittee of the small businessissuer's board of'directors (or persons performing the equivalent functions) :

(a) all significant deficiencies and material weaknesses in the design

or operation of internal control over . fnancial reporting which are reasonobtl7

likely to adversely gff'ct the sinall busine ss issuer's ability to record, process,

summarize and report financial information ; an d

(b) any fraud. whether or not material, that involves management orother employees who have a significant role in the small business issuer's internalcontrol over financial reporting ..

March 31 .2006Isl Christopher d'Arnaud-TaylorChristopher d'Arnaud -TaylorPresident and Chief Executive Office r

A : :*: I:

March .31, .200 6!s/ Lawrence BelloneLawrence BellonePrincipal Financial Officer

Joint Certification of Principal Executive Office rand Principal Financial Officer Required by Exchange Act Rule 1 .3a-14(b)

In connection with the Annual Report of Xethanol Corporation (the "Company")on Form i 0-KSB for the year ended December 31, 2005 as filed with theSecurities and Exchange Commission (the "Report"), we, Christopherd'Arnaud -Taylor , President and Chief Executive Officer, and LawrenceBellone, Principal Financial Officer and Principal Accounting Officer,certify, pursuant to 18 U .S C. ss ..1'50, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002, that-

I . The Report fully complies with the requirements of section 13(a) or 15(d )

of the Securities Exchange Act of 1934; and

7 . The information contained in the Report fairly presents, in all materialrespects, the. fnancial condition and results of operations of the Compaii y.

March 31, 200 6Isl Christopher d'Arnaud-TaylorChristopher d'Arnaud -TaylorPresident and Chief' Executive Office r

Isl Lawrence Bellone

Lawrence BellonePrincipal Financial Office r

[Emphasis added]

60 . The statements about the Company that appeared in the Fortune Small Busines s

Magazine article . Xethanol's January 31 . 2006 and February 27. 2006 releases and those

statements contained in the Company"s 2005 Form 10-KSB, referenced above, were eac h

materially false and misleading when made. and were known by defendants to be false or wer e

recklessly disregarded as such thereby, for the followi€1 g reasons, among others :

(a) Throughout the Class Period, it was not true that the Company was bein g

run by management with credibility and a high standard of ethics, nor was it true that defendan t

.33

Taylor had significant management experience at major domestic corporations that he purported

to bring to bear at Xethanol . In truth , defendant Taylor had fabricated his resume and had never

worked at companies such as Unilever, Northrop Grumman, and Reed Elsevier . In addition,

many of the Company's initial investors had prior histories of stock fraud, market abuse . breach

of fiduciary duty and breach of contract ;

(b) At all times during the Class Period, unbeknownst to investors, defendants

had misrepresented the true state of the Company's Hopkinton, Iowa plant . In fact, at al l

relevant times, this plant was not being refurbished but, rather, it lay abandoned and neglecte d

with no current water or sewer service and no employees working at the site ;

(c) At all times during the Class Period, unbeknownst to investors, defendant s

had omitted disclosing a host of related party transactions, as well as associations with severa l

early stage investors that had alarming records of stock fraud, market manipulation, breach o f

fiduciary duty and shareholder abus e

(d) At all tines during the Class Period, unbeknownst to investors, defendant s

had materially overstated the Company's profitability by render-repot tint Xethanol's true cost o f

completing a biomass to ethanol production facility and by failing to make proper . timel y

adjustments to the Company' s stated financial reports and balance sheet ;

(e) Throughout the Class Period, it was also not true that Xethanol containe d

adequate systems of internal operational or financial controls, such that Xethanol's operationa l

and financial reports were true . accurate or reliable :

(1f) As a result of the foregoing, it was also was not true that the Company' s

financial statements and reports were prepared in accordance with Generally Accepted

Accounting Principles ("GAAP") and Securities Exchange Commission ("SIC") rules . I n

.34

addition, because of the lack of true independence between the Company and many of it s

business partners and Joint venture partners, and because of other material omissions an d

representations, the risk of investing in Xethanol was materially higher than defendants disclose d

and than investors could discern through a reasonable due diligence investigation ;

(g) As a result of the aforementioned adverse conditions which defendants

failed to disclose, throughout the Class Period, defendants lacked any reasonable basis to clai m

that the Company was operating according to plan, or that Xethanol could achieve the near-ter m

commercialization of biomass ethanol production or achieve the guidance sponsored and/o r

endorsed by defendants .

61 . The representations and reassurances contained in the 2005 Form ] 0-KSB had

their intended effect, As evidence of this, by the beginning of April 2006, however, shares of th e

Company continued to rally . Moreover, Xethanol shares continued to rally immediately prior t o

and following a string of positive announcements by defendants . Accordingly, on April 4, 2006 ,

over I million shares of Xethanol traded to a high of `i ;8 .4() per share after defendants announce d

that the Company had negotiated to raise up to another S46 million in new private equit y

fundina ..

62 .. In connection with the announcement of this additional funding, defendant s

published a release that stated, in part, the following :

HEADLINE: Xethanol Raises up to $46 Million in Equity Capita l

Xethanol Corporation (O-1'CBB :XTHN), a biotechnology driven ethanolcompany, announced today that it has signed definitive agreements for up to $46million in two separate equity financing transactions ,

Under the terms of the first transaction . Xethanol will initially receiveapproximately $30 million from the issuance of shares of its con-irnon stock toinstitutional and private investors,. Additionally . over the next three years .Xethaanol could receive up to an additional $10 .6 million from the exercise o f

35

warrants issued to these investors .. .. . . As part of this transaction, the company hasagreed to file a resale registration statement on Form S13-2 with the Securities andExchange Commission within 30 days following the closing for the purpose ofregistering for resale the shares of common stock sold in the financing .

Under the terms of the second transaction. Xethanol will initially receive $4million from the issuance of'shares of its common stock to Goldman Sachs & Co .Additionally, over the next three years, Xethanol could receive up to an additional$1 .4 million from the exercise of warrants issued to Goldman Sachs . . .

Christopher d'Arnaud-Taylor, Chairman and CEO of Xethanol stated We have

been steadily buildin our hrrsirre.ss opportunities over the last year in

preparation for this significant capital infusion which will now allow us toexecute these plans. They include the e'Lparrsion of our a sting facilities, nets'plants in the .southeast and northeast regions, and, most importantly, the

integration and comrrrercialization of our technologies. Ilaving this capital

really marks the beginning of our abililt- to realize our stated goal of being a

leader in the enrer°gin biomass-to-ethanol lndustl 't> by employing cutting edge

technology ies in the conversion of lowv-cost biomass and other waste streams . "

Mr. d'Arr aud-Taylor further stated "'bile Company is extremely fnr•tunate to gainthe support of the investor's participating in these financings . It is gratifying to seeour btcsiness model validated." [Emphasis added . ]

6 .3 . Following the publication of this announcement, on April 5 . 2006. shares of the

Company traded to a high of over $10 .00. again on volume of over I million shares traded, By

April 10, 2006, the Company's shares continued to trade at above I million shares per day ,

climbing to $12,35 per share . The following day, April 11, 2006, over l million more share s

traded at that level after defendants announced that Xethanol was exploring strateg ic growth

opportunities in California, consistent with its Phase 11 biomass commercialization growth

strategy .

64 . At that time, defendants published a release that stated . in part, the following :

Xethanol Explores Strategic Growth Opportunities in California ; Company

Hires Christopher Dillow to Increase Corporate Visibility in Californi a

Xethanol Corporation (OTCBB :XTHN), a biotechnology driven ethanolcompany, announced today that it has hired Christopher Dillow . a Newport Beach

a6

based venture capitalist, to explore strategic grorvtlr opportunities for Xethannolin the large and expanding California ethanol market.

Christopher d'Arnaud-Taylor, Xethanol's Chairman and Chief Executive

Officer, commented : "As we are currently focused on our east coast regional roll-

out, we are not yet ready to tackle the California ethanol market . However, now is

the time to develop our market penetration strategy in that region . We have

therefore hired Christopher Dilloiv to assist Xethanol in gaining greater

visibility in the California market and to identify and evaluate potentialstrategic Partners for us to team with . We have enjoyed an extensive and

productive working experience with Christopher and we are delighted to

formalize this relationship for California . "

Mr. d'Arnaud-Taylor continued : "California's demand for ethanol is about one

third of the current US market . Almost all of the 900 pillion gallons of ethanol

consumed in California in 2004, equal to more than $1 .3 billion, was imported by

rail or ship, mainly from Corn-Belt ethanol producers . California presently hosts

production of only 8 million gallons per year at two small-scale operations,although there are ambitious plans to build several more plants that will primarily

use corn as feedstock .. We expect that Californtia will be a huge opportunity for

its to deploy cutting edge technologies for the conversion of low cost bionlassand other waste streams to ethanol ." [Emphasis added .. :]

65 . The statements made by defendants and contained in the Company's April 4.

2006 release and those statements contained in the Company's April 11, 2006 release, wer e

materially false and misleading and were know by defendants to be false at that time . or were

recklessly disregarded as sruclr . tier the reasons stated herein in 1 1 60, supra

66 . On April 17 . 2006 . Xethanol stock traded to $14 .50 per share on volume of over

1 6 million shares traded after defendants announced that they had closed on the 546 millio n

equity financing. That day, defendants also published a release announcing the financing .

67 . On April 24, 2006 . shares of the Company traded above $15 .50 alter defendants

announced that Xethanol had entered into a "strategic equity" arrangement with 1-1?Diesel, In c

to produce ``BioDiesel" fuel, The prior trading day . April 21 . 2006 , defendants published a

release that stated, in part, the following :

Xethanol Enters Biodiesel Market

i7

Xethanol takes strategic equity stake in H2Diesel, Inc, to manage and deployadvanced BioDiesel technology and enters into sublicense agreement toproduce BioDiesel fue l

Xethanol Corporation (OTCBB :XTI-IN), a biotechnology driven ethanol company,announced today that it has entered into an agreement with 1-12Diesel, Inc. Underthe terms of the agreement, Xethanol will manage the business of H2Diesel, whichis to deploy the proprietary biodiesel conversion technology that H2Diesesl ownsunder an exclusive license for North America, Central America and the Caribbean .

Xethanol received equity in H2Diesel for its management role and for entering intoan option under which shares held by I-I2Diesel investors may elect to exchangetheir equity in H2Diesei for shares in Xethanol . In a separate agreement, Xethanolwas granted a sub-license to produce and sell biodiesel using H2Diesel'sproprietary process in certain states . Under the agreements. Xethanol can acquire amajority interest in H2Diesel .

a: * *

Lee Rosen . Chief Executive Officer of H2Diesel, said . "I am very pleased to have

entered into such a comprehensive and strategic agreement with Xethanol . We

believe that Xethanol's proven expertise in the alternative fuel sector and

commitment to processing waste streari s, combined with H2Diesel's technology,

will drive rapid and widespread deployment of our unique system for producingbiodiesel . We further believe that our teclviology, which reduces the capital

expense in scaling biodiesel production and represents a quantum leap in

simplifying conversion of oils into biodiesel, will make a meaningful contribution

to our country's move towards energy independence . "

Christopher d'Arnaud-Taylor, Xethanol's Chairman and Chief Executive Officer,.commented : "Xethanol has been able to identify and acquire cutting edgetechnologies for converting biomass waste streams into ethanol . The H2Diese!technology, and our commitme nt to its deployment, reinforces our ►rtission to bein the . forefront of innovation in the biofuels sector. It further leverages our core

competency of integrating technologies for converting 4 nierica's pro/f/ c waste

streams into biofiiefs ., We believe that the H2Diesel system is superior to curren t

processing techniques and will therefore make a sit nificant contribution to thecontinued growth of this industry . "

Mr. d'Arnaud-Taylor continued : "This H2Diesel strategic initiativecomplements our core ethanol business . We have been committed to expanding

our business into other bio .tuels besides ethanol and having a presence in the

biodiesel i Market has always been a key part of our strategy . The HZDiesel

technology is raid), to commercialize, making this an aptlnlal strategic alliance,.F3iodiesel, the other mainstream biofuel along with ethanol . is curxrently the most

38

rapidly growing alternative fuel market in the world . Current biodiesel productionin the USA is approximately 100 million gallons per year- The U . S Departmentof Agriculture estimates that US demand for biodiesel fuel will exceed 800million gallons by 2010 .. Based on H2Diesel technology advantages of scalabilityand simplicity and production cost, ice are confident that the H2Diesel-Xethanolalliance is well positioned to capture a significant share of this explodingmarket " [Emphasis added .. ]

68 . On April 28, 2006, again more than I million shares of Xethanol stock trade d

after defendants announced that the Company was set to expand in New England alter ibrmin g

an alliance with Global Energy Management . At that time, defendants again published a releas e

that stated, in part, the following :

HEADLINE: Xethanol Set to Expand in New England ; Company ForgesNewEnglandXethanol Strategic Alliance with Global Energy Managemen t

Xethanol Corporation (OTCBB :XTIIN), a biotechnology driven ethanolcompany, announced today that it has organized NewE.nglanldXethanol Ll_Caccelerating its growth plans to roll out ethanol production throughout the EastCoast .. NewEnglandXethanol will be a strategic alliance between Xethanol andGlobal Energy Management LLC Its mission is to develop ethanol productionin Connecticut. Massachusetts, Rhode Island, New Hampshire. Maine andVermont . This follows the previously announced Coastal .XethanoI initiative toexpand ethanol production throughout Georgia and the South East region .

NewEnglandXe€hanol will focus on a region with a strong environmental heritageand rich in biomass residues . NewEnglandXethanol plans to open several ethanolplants throughout the region deploying Xethanol's proprietary technologies .Moreover .. NewL.nglandXethanol may co-locate biodiesel production in itsFacilities under Xethanol's sub-license from I-I?Diesel, Inc .

Mr. d'Arnaud-Taylor, Chairn-man and CEO of Xethanol commented : "This

alliance between Xethanol and Global Energy Managelnent leading to the

formation of NeinE►rglrrndXethrrnrol is the second milestone in our East Coast

regional roll-out plan , We are confident that 1. ee and his team's experience in

developing projects throughout the northeast and their Native American economicrelationships in particular will help catapult NewEnglandXethanol into fast track

production of ethanol ." (Emphasis added . .[

~9

69, The statements made by defendants and contained in the Company's April 21 ,

2006 release and those statements contained in the Company's April 28, 2006 release, wer e

materially false and misleading and were know by defendants to be false at that time, or were

recklessly disregarded as such, for the reasons stated herein in ¶60, supra.

70. On May 15, 2006, defendants filed with the SEC the Company's Form 10-QS B

for the first quarter ended March .31, 2006, signed and certified by defendants Taylor an d

Bellone . The 1Q :06 Form 10-Q stated, in part, the following :

NOTE 1 . DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATIO N

Xethanol Corporation (the "Company") is a biotechnology-driven company in the

emerging biomass-to-ethanol industry,. The Company produces ethanol and its co-

pr-oducts . Ethanol is a clean burning, renewable fuel and is used as a primary

gasoline additive under the Energy Policy Act of 2005 . The Company plans to

optimize the use of biomass in the renewable energy,/ieltl and convert biomassthat is currently being abandoned or land filled into ethanol or other valuableco products. The Company's business model is to deploy proprietary

bioteclzuologies that will extract and ferment sugars trapped in biomass waste

concentrations in a cost effective manner by locating ethanol plants closer tobiomass sorn•ce5 and in proximity to urbanized high-demand ethanol markets .

The accompanying consolidated financial statements and related footnotes should

be read in conjunction with the consolidated financial statements and related

footnotes contained in the Company's Annual Report on Form 10-KSB for the

year ended December 31 . 2005 filed with the U,S . Securities and ExchangeCommission on March 3 1 . 2006

The consolidated financial statements include the accounts of the Company and

its wholly-owned subsidiaries All significant intercompany accounts andtransactions have been eliminated in consolidatio n

The consolidatedfinancial statements have been prepared in accordance withthe rules and regulations of the U.S. Securities and E.ichrur;e Contmissroltrelated to interim statemnelits , The financial information contained herein isunaudited ; however, in the opinion of management, all adjustments necessary for

a fair presentation of such financial information have been included . All suchadjustments are of a normal recurring natur'e . . . [Emphasis added

40

71 . The I Q.-06 For i -n I0-QSB also contained statements concerning the Company's

related party transactions , as follows :

NOTE 6. RELATED PARTY TRANSACTIONS

In February 2005, the Company entered into a Consulting Services Agreementwith Jeffrey S . Langberg, a stockholder and member of the Company's Board ofDirectors, pursuant to which Mr . Langberg agreed to provide general businessadvisory services . Under this agreement, the Company pays Mr . Langberg amonthly consulting fee of $15,000 and Mr .. Langberb is eligible to receive awardsunder the Company's 2005 Incentive Compensation Plan, Mr . Langberg does notreceive any compensation otherwise payable to him as a director . During thecurrent quarter. Mr. Langherg received consulting fees of $45,000 and wasawarded a performance bonus of $400,000 payable during 200 6

72 .. The Company's ]Q:06 Form 10-QSB also contained statements concerning th e

Company's internal controls and procedures, as follows :

Item 3. Controls and Procedures

Disclosure controls and procedures are our controls and other procedures that aredesigned to ensure that information required to be disclosed by Lis in the reports

that we file or submit under the Securities Exchange Act of 1934, as amended (the

"Exchange Act"), is recorded, processed, summarized and reported, within the

time periods specified in the U .S. Securities and Exchange Commission's rules

and forms ., Disclosure controls and procedures include, ;without limitation,

controls and procedur °e .c designed to ensure that information required to he

disclosed bt' its in the reports that we file under the Exchange Act is

accumulated and communicated to our management, including principal

executive officer and principal financial officer, as appropriate, to allow tirlrclpdecisions regarding required disclosure.

Our Chief Executive Officer and Chief Financial Officer have evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures its of the end of the period covered by this report. he evaluation

process, including the inherent limitations on the effectiveness of such controls

and procedures, is more fully discussed below . Based upon our evaluation of the

effectiveness o1 the design and operation of our disclosure controls and

procedures, our Chief Executive Officer and Chief Financial Officer have

concluded that as of the end of the period covered by this report,

notwithstanding the prior existence of certain !material weaknesses, our

disclosure controls acrd procedures were effective.

41

There has been no change in the Company's internal controls over financialreporting during the fiscal quarter ending March .31, 2006 that has materiallyaffected, or is reasonably likely to materially affect, the Company's internalcontrols over financial reporting, [Emphasis added ]

73 . The I Q.06 Form I 0-QSB also contained certifications by defendants Taylor an d

Ballone that purported to attest to the veracity and completeness of Xethanol's disclosures an d

controls . The ".Joint Certification of Principal Executive Officer and Principal Financial Office r

Required by Exchange Act Rule 1)a-14( b)," contained in the I Q:06 Form 10-QSB stated in part

the following :

The information contained in the Report fairly presents , in all material respects,the , financial condition and results of operations of the Cnrtzplr~r ~.

[E phasis added] .

74 The statements made by defendants and contained in the Company's I Q :06 Form

IO QSB were materially false and misleading and were know by defendants to be false at that

time, or were recklessly disregarded as such, for the reasons stated herein in X60, .supra

75., During the four, trading days between May 19 and May 24, 2006, over 5 .75

million Xethanol shares traded . Fueling that momentum, in May 24, 2006, defendants published

a release that announced that the Company had signed a letter of intent to acquire another plant ,

located in Augusta, Georgia . This release stated , in part, the following :

Xethanol to Acquire Plant in Georgia; Proposed Purchase of Pfizer

Manufacturing Complex Through Coastal .Xethanol Subsidiar y

Xethanol Corporation (OTCBB :XTHN), a biotechnology driven ethanolcompany, announced today that its CoastalXethanoI subsidiary has signed a lettero f intent with Pfizer , Inc. (NYSE : PFE) to purchase Pfizer's pharmaceuticalmanufacturing complex located in Augusta. Georgia . While details are yet to befinalized . CoastalXethanol and Pfizer are working together to complete thetransactio n

The state of the art, 40 acre site includes: an 89,100 square foot manufacturingfacility, a 25,000 square foot warehouse facility, 7,300 square feet of laborator y

42

space, and 16,000 square feet of offices and conference rooms, CoastalXethanolintends to retrofit the site to produce 35 million gallons per year of ethanol . . Thefacility will produce ethanol from cellulosic and other biomass waste streamsgenerated by industrial producers in the surrounding areas. This biomass-to-ethanol facility will be the first of its kind in the region . In addition,CoastalXe€hanol may produce biodiesel in this facility under Xethanol'ssublicense from H2Diesel . Inc.

a : :, : 1:

Mr. d'Aruau -Taylor, Chairman and CEO of Xethanol commented : "The

proposed purchase and conversion of this facili€y serves as an excellent template

of our strategy of acquiring existing ilnlustrial plants and adapting thelrr to

produce ethanol and biodiesel. Because of the size and existing infrastructure

of Ibis facility, it gives Xethanol an exception a! platforrlr, from which to launch

its CoastalXethanol production initiative in a meaningful wvay. We believe this

will be the first of several significant acquisitions in the Southeast .. Xethanol

appreciates Mayor, Copenhaver's and Augusta's enthusiasm and assistance . The

Mayor and his team were quick to grasp that our waste to ethanol technologies

not only create renewable energy in the region, hut also help solve waste

disposal issues associated with the forestry industry . "

[Emphasis added, ]

76. The Company's purported plans for growth in the Southeastern region of the

United States were reinforced later, on May 3 1, 2006. when defendants published a releas e

announcing an "alliance" with Coastal Energy Development. -1-his release stated . in part, the

following :

Xethanol Set for Southeastern U .S. Growth ; Company SolidifiesCoastaiethanol Strategic Alliance with Coastal Energy Developmen t

Xethanol Corporation (OTCBB :XTHN), a biotechnology driven ethanolcompany, annou nced today that it has completed the or,-anization of

CoastalXetlrarrol, LLC, continuing to bolster its growth plans to roll out ethanolproduction throughout the East Coast. CoastalXetlrrrrrol will be a strategicalliance betiveerr . Xe>thanol and Coastal Energy Development, Inc. Its mission is

to develop ethanol production throughout Georgia and the Southeast r egion . . .

CoastalXethanol will focus on a region with a strong environmental heritage and

rich in biomass residues .. Coastal. Xetl anal plans to open several ethanol plantsthroughout the region deplqying Xetlrruto!'s proprietart, technologies .

43

Moreover, CoastalXethanol may co-locate biodiesel production on its facilitiesunder Xethanol's sub-license from H2Diesel . Inc ..

k

CoastaiXethanol is also actively pursuing a second opportunity in Savannah,Georgia for a proposed 20 million gallon facility, also using biomass wastestreams. CoastalXethanol has acquired a lease/purchase option on a potential site .

Christopher d'Ar•nand-Taylor, Chairman and CEO of Xethanol commented :

"For mini; alliances with experienced, knowledgeable partners is kep to our

r°et ional expansion strategy, he team at Coastal Energy Development has the

requisite diversity of skills to develop a significant regional presence . The Coastal

Ener y team has been critical in the acquisition of the recently announcedAugusta facility fr•orri Pfizer as ivell as the potential opportunity in Savannah.We look for ward to ►vor•king with Chandler Hadlock and his group mfin allzingthis important acquisition and developi ng future projects "

[.Emphasis added . ]

77 The statements made by defendants and contained in the Con pany's May 24 ,

2006 release and those statements contained in the Company's May 21, 2006 release, were eac h

materially false and misleading and were know by defendants to be false at that time, or wer e

recklessly disregarded as such, for the reasons stated herein in X160 ; supra

78 Again. on June 15, 2006, volume in Xethanol share trading spiked afte r

defendants published a release, the prior day, that announced that the Company had purportedl y

acquired additional biomass technologies essential for the conversion of biomass into ethanol .

At that time defendants published a release stating, in part . the following :

`ethanol Acquires Advanced Biomass Gasification Technologies , Inc, fromUTEK; Acquisition Includes Exclusive Worldwide License to Assist in

Integration and Commercialization of'the Technology

Xethanol Corporation (OTCBB:XTFIN) . a biotechnology driven ethanolcompany. and UTEK Corporation (AMEX :UTK) (l_,SE-AIM :UTK), a specialtyfinance company focused on teclinolo gy transfer , announced today that Xethano l

44

has acquired Advanced Biomass Gasification Technologies , inc . (ABGT), awholly owned subsidiary of UTE.K, in a stock transaction ..

AI3GT holds the exclusive worldwide license for MicioGasification technologydeveloped at the Energy and Environmental Research Center (EERC) at theUniversity of North Dakota in Grand Forks . The MicroGasifier produces syngasfrom carbon natter . Syngas drives a portable, power generation system thatprovides energy solutions for companies and municipalities with simultaneouswaste disposal and power needs Xethanol and EERC are mutually funding aCooperative Research and Development Agreement (CRADA) to further applythe MicroGasiher in the production of ethanol . EERC will perform systemintegration of the MicroGasifier for customers

"In acquiring ABGT, Xetlrrrr:ol 's objective is to provide it lower cost altern ativeto steam boiler power generation with a small footprint waste -- to-energytechnology utilizing low-cost biomnass feedstocks and wave Streams, " said Mr.

Christopher d'Arnaurl-Taylor, Chief Executive Officer of Xethanol .. He added,"Creating energy from industrial and biomass waste such as lignin, a byproduct ofcellulosic ethanol production, and is a critical component of our business modelmost especially in light of the high cost of oil and natural -as . "

Mr. d'Arnaud -Taylor continued . This acquisition establishes a strategic

alliance between Xethanol and E.E.RC ; a leader in the field of gasification, and

represents a major opportunity to enter the market with a powerhrl waste-to-

energy technology with broad applications in a multi-billion dollar globalindustry ." [Emphasis added .. ]

79 . During the three trading days between .]Line 21 and 23, 2006, another almost two

million Xethanol shares traded, following a report by the New Yoik Povi that highlighted the

Company . In addition to reporting that Xethanol shared an office address with defendan t

Taylor' s London Manhattan Securities at 1185 Avenue of the Americas , The Pwd report also

described the Company as possessing technology to convert garbage and plant waste into ethano l

fuel .

80. On June 26, 2006, defendants published an unusual release that directl y

responded to allegations that had begun to surface in the market, that questioned, among other-

things, the formation of the Company This release titled, "Xethanol Sets the Record Straight"

stated, in part , the following :

45

HEADLINE: Xethanol Sets Record Straight Following MisleadingStatements by Motley Foo l

Xethanol Corporation (AMEX:XNL.) today issued the following in response toinaccurate information that was included in a number of Internet articles duringthe past several days .

Following an article published by The Motley Fool on Friday . June 23, thatcarried a number of inaccurate and misleading statements about the company .Xethanol said :

The Motley Fool article authored by Ryan Fulurriarin has a number ofinaccuracies and misleading statements, foremost of which is a quote attributed tothe New York Times, which in reality is taken out of context from a New YorkPost story that appeared on Thursday, ,Lune 22 . More importantly, the Motley Foolarticle, which has since been referenced by other online blogs further perpetuatingthe inaccuracies. suggests that Xethanol was formed simply to capitalize on theethanol interest in today's market .

Nothing is further from the truth . Xetltrtrrol was formed in 2001 with theexpress strategy to develop its business in the emtrergin, biomass-to-ethanolindustry. Since 2001 , Xethanol has been engaged in the business ref developing

and operating facilities for the production of ethanol. It continues to beengaged only in that business and in the development of technologies and

facilities for the production of outer hiofttels .

Like trrniry other successful companies, .ethanol merged with a reporting shellcorporation so that its shares could be publicly traded. The Compaq..),

srlbsequentl)' registered its outstalrrltna shares li' th the SEC and applied.for the

listing of its shares on the American Stock Exchange. The Company's colt mon

stock was approved for listing on June 16 and is now bein traded on the

AMEX

All the prior businesses of Zen were discontinued when Xethanol merged ► iwith

Zen. None of .Xetltatrol's management were involved with Zen or its businesses

and none of Zen 's management or owners are involved will, Xethalloh Zell :5prior businesses are irrelevant to Xetlratrols operations or performance and

.Xethanol'.s fttrnttcial statements reflect only the opr't°rrtions of'Xeflirttral .

Xethatrol continues to successfully operate and expand its busitless . In

recognition of that fact, well-known financial institutions have invested in

Xethanol and leading government and academic research facilities, including

those of the United States Department of Energy and the United States

Department of Agriculture have licensed their technologies to Xethariol on an

exclusive basis .

46

The Motley Fool article is misleading and does an u;,justified disservice toXetlralrol, its shareholders and the investing public. The misleading statementsin the article were so egregious that Xe thalrol.felt compelled to respond..

[Emphasis added. ]

81, The following day, June 27, 2006, defer ►dants published another release tha t

announced the Company's purported "progress in New England regional expansion " that stated ,

in part, the following .

Xetbanol Progresses in New England Regional Expansio n

Xethanol Corporation (AMEX :XNL), a biotechnology driven ethanol company,announced today that it has joined with Global Energy and Management, LLC toform a new venture to develop ethanol production in Connecticut, Massachusetts,Rhode Island, New Hampshire, Maine and Vermont. The new venture, known asNewEnglandXethanol, LLC or NEX, plans to open several ethanol plantsthroughout the region deploying Xethanol's proprietary technologies ..Additionally, Xethanol may co-locate biodiesel production in its facilities LinderXethanol's sub-license from II2Diesel, Inc .

Christopher d'Arnaud -Taylor, Chairman and CEO of Xethanol commented :

"Strategic partnerships with conzpanies like Global Energy will enable us toaccelerate our production goals and reach our stated Ion-term objectives oflurking ethanol ,from regionally sourced biomass and waste streams . While

Xethanol's core competence is in operating facilities and integrating technology,

Global Energy's team brings complementary skills in identifying and securingsuitable project sites, in procuring government support as well as in spear headingthe Permitting process

[Emphasis added . ]

82 . The statements made by defendants and contained in the Company's June 15 .

2 006, its June 26, 2006 and its June. 27, 2006 releases were each materially false and misleadin g

and were know by defendants to be false at that time, or were recklessly disregarded as such, far .

the reasons stated herein in N,60, ml)i°ca

47

83, As late as July 6, 2006, shares of the Company continued to trade above $10 .00

per share, after defendants announced, the prior day, that Xethanol had selected PRA J

Technology to design a new 35 million gallon ethanol facility at its Blairstown, Iowa site . That

release stated , in part, the following :

Xethanol Selects PRAJ Technology for New .35 Million Gallon EthanolFacility at its Blairstown Site in Iow a

Xethanol Corporation (AMEX :XNL), a biotechnology driven ethanol company,announced today that it has selected ethanol production technology developed byPRAJ Industries Ltd . . for a new ethanol facility at its Blairstown, Iowa site . PRAJtechnologies will include detailed engineering services, process design andlicensing as well as the supply of vital sections of the process plant. Tire newfacility will have a nameplate capacity of .35 million gallons per ,year of fuelethanol and will be developed alongside the company`s existing plant which willcontin tie to operate at rrrrrxin unz capacity .

Christopher d'Arnaud-Taylor, Chairman and CEO of Xetl anol commented,

"PRAJ is, a world leader in bio --ethanol technology, providing cutting edge

design and construction and suite-of-the-art engineering . for ethanol productionfrom a range of feedstocks ., After a rigorous evaluation of their technology

platform, including visiting ]'RAJ facilities in India and Colombia, we decided to

commit to PRAJ Technology. PR4J's technology platform is biglrly adaptable to

different feedstocks. We are very pleased to be working with PRAJ on this

significant project and we look forward to developing multi-feedstock plants

using cellulosic biomass in the future, "

Mr. d'Arnarud-Taylor further commented , "Our Blairstown site in Iowa is over

25 acres with ample space to support this significant expansion . The site is

already permitted for ethanol production with much of the required infrastructure

in place and feedstock readily accessible . We expect this plant to core on line in

the second half of 2007 Thereafter, we will re trofit our cur rent 6 million gallonfacility at Blairstown by adoptin our technology platfor►n and converting thatIn,plant to cellulosic feedstocks." He added, "Expanding Blalrstowll iS a criticalstep in achieving our planned production goals . When completed, the two

facilities at our Blairstown site will be runnino at 41 million gallons per year with

state of the art technology and the flexibility to run a variety of Ieedstocks . We

are making great progress in integrating our cellrrlo.sic technologies for frill

commercialization .

84 Similarly, on July 20, 2006, defendants again published a release that announce d

that the Company's 50 million gallon cellulosic ethanol facility at Augusta . Georgia, slated for

48

production by mid-2007, also utilized PRAJ Technology to provide engineering services Thi s

release stated, in part . the following :

HEADLINE: New 50 Million Gallon Cellulosic Ethanol Facility at Augusta,Georgia Site to Begin Production by Mid 2007 ; PRAJ Technology and TheFacility Group Selected to Assist in Engineering and Constructio n

Xethanol Corporation (AML.X :XNL), a biotechnology driven ethanol company,announced today that it has completed its due diligence process on its previouslyannounced acquisition of a Pfizer pharmaceutical manufacturing complex inAugusta, Georgia and will be closing on the comply within 30 days . Thecompany also announced plans to construct a .50 million gallon per yearcellulosic ethanol plant on the site which would begin producing ethanol bymid-2007.

PRAJ Technology, an India based world leader in bio-elharrol technology willprovide detailed engineering services, process design and licensing as well asthe supply of vital sections of the process plant . PRAJ was also selected toprovide the same services fbr Xethanol's recently announced new 35 i- illiongallon per year facility at its Blairstown, Iowa site .

Christopher d'Arnaud -Taylor. Chairman and CEO of Xethanol, commented

"Having completed ou€- due diligence on the site, we decided to raise the capacity

of this plant to 50 million t allons per year . It is being designed to run on avariety of feedstocks and we are already securing the necessary feedstock

streams fi°arrr the forest products industry to run at capacity wizen we begin

production by mid-2007. Btu combining Xethanol `s proprietary, technologieswith those of PRAJ, ► ne believe that we will have achieved our goal of being rr

low-cost producer of fuel ethanol from cellulosic materials. With our recent

announcement of expanding our Blairstow€i, Iowa facility to 41 million gallonsper, year and bringing Augusta on line with 50 million gallons per year, our stated

production goals are within our sights . "

Mr . Taylor further went on to say "We have selected two leading companies to

facilitate the expeditious construction of the Augusta plant PRAJ is a world

leader in bio-ethanol technology, providing cutting edge design and

construction and state-of-the-art engineering for ethanol production from it

range of feedstocks . The Facility Group is one on the most highly regarded

facilities contractors in the country . We are very pleased to be working with both

PRAJ and The Facility Group on this project . "

Lucas Rice, Xethanol's VP of Operations stated "This site is a prime e.vamnple ofXctlrarrol ¶s strategy of exploiting shuttered industrial capacity and converting

49

facilities that already have existing infrastructure to produce ethanol . In doingso, the company is able to save significant time and money in bringing facilitieson line . This site, in particular, has millions of dollars in equipment andinfrastructure in place and ready to use for ethanol production." [Emphasisadded. ]

85 . On July 21, 2006, defendants also field with the SEC a copy of the Company' s

Annual Proxy statement . In the Annual Proxy defendants reiterated the same or substantially

similar statements concerning the relationships of third parties to Xethanol . In this regard,

defendants reported related party transaction and extra-Company relationships that wer e

previously reported by defendants and contained in the Company's 2005 Form I0-KS B

86 . On July 24, 2006, defendants published a release announcing the Company' s

renewal of its strategic alliance with UTEK Corp . This release stated , in part, the following :

Xethanol and UTEK Announce Renewal of Their Strategic Allianc e

Xethanol Corporation (AMEX :XNI ), a biotechnology driven ethanol company,and UTEK Corporation (AMEX :UTK.) (ISIW.-AIM :UTK), a specialty financecompany focused on technology transfer, announced today that they have signed arenewal of their strategic alliance agreemen t

Chief Executive Officer of Xethanoi, Mr. Christopher d'Arn a ud-Taylor slated,"I (dill excited about renewing this ,strategic alliance with UTEK that has been

very Productive for its since its inception. It wi/I continue our access to

prestigious research and development institutions in search of the proprietary

technologies that provide us with competitive advantages in biofuels productionWe are firm believers that a strong intellectual property platform is the key todifferentiating Xethanol in the marketplace "

[Emphasis added ]

87. On August 7 . 2006. the final day of the Class Period, shares of Xethanol traded to

$8,00 per share, alter defendants published a release announcing that the Company had entered

into an agreement to purchase the Auugusta . Georgia site . According to a release published by

defendants that day, Xethanol announced "that it has entered into an agreement to purchase a

50

pharmaceutical manufacturing complex in Augusta . Georgia from Pfizer Inc . as described in

prior press releases . "

88 The statements made by defendants and contained in the Company's July 6, 2006 ,

July 20, 2006 . July 24, 2006 and August 7, 2006 releases and those statements contained in th e

Company's Annual Proxy Report, were materially false and misleading and were know b y

defendants to be false at that time, or were recklessly disregarded as such, for the reasons state d

herein in 1160, supra .

THE TRUE FINANCIAL AND OPERATIONAL CONDITIONOF XETHANOL IS BELATED DISCLOSE D

89. On or about August 8 . 2006, shares of Xethanol declined precipitously afte r

investors were shocked and alarmed by the publication of a report that was highly critical o f

Xethanol, published by a forensic securities investigations Internet website calle d

ShareSleu t h corn .. in fact, shares fell from a high of $8 .00 on August 7, 2006, to a close of below

$6.00 the following day . and in the two trading days that followed almost 2 million mor e

Company share s traded, as Xethanol stock then fell to a low of $4 21 l3et share, on August 10 7

2006 - - a three day decline of almost 50% ,

90 According to a report by the ..4,ssociated Pre s . Xethanol shares fell after a websit e

owned by Dallas Mavericks owner Mark Cuban reported that there was little evidence Xethano l

had produced significant amounts of ethanol from biomass to claim that it could achiev e

commercialization, and that substantial related party associations had not been disclosed - -

including the fact that many of the Company's early investors had been disciplined by regulatory

agencies and that defendant Taylor had blatantly lied about his work experience an d

qualifications . The A'sorcirrled Press report stated , in part, the following :

51

The 6,000-word story about Xethanol Corp . was the first published by the Cuban-backed stock fraud-investigating Web site Shw esleutla . com It was written byformer St . Louis Post-Dispatch reporter Christopher Carey .

Xethanol has said it can convert wood chips, corn stalks and paper sludge intoethanol, an additive designed to make gasoline cleaner-burning .

Shrar •e.sleutlr. corrr reported if .found no evidence that Xethunol had producedsignificant amounty of ethanol from those materials. It also said the company' crecent Securities and Exchange Commission filings listed eight shareholder

who have been disciplined by the SEC or other 1'e ulatory agencies ,

H, k

Sharesleuth, .com delayed its Xethanol story for about a week while it was beingfact-checked, Carey said . He said the fact-checking process "takes ammunitionaway from anyone who says we're publishing false and misleading material sothat Mark Cuban can turn a profit on his investments ." Emphasis added ]

91 .. The ShcrreMenth corn report contained several specific charges of fraud ,

misreprese ntations and material omissions by those Company officers and directors named as

defendants herein . These allegations ranged from : (i) defendant Taylor lying on his resume an d

fabricating significant work and management experience at major US. corporations that he di d

not possess -, (ii) dejendants ' misrepresenting the true state o f the Company's Hopkinton . Iowa

plant, that was not being refurbished but, rather, that lay abandoned and neglected with n o

current water" or sewer service, (iii) defendants' omitting to disclose a host of related party

transactions, as well as associations with several early stage investors that had alarming record s

of stock fraud, market manipulation , breach of' fiduciary duty and shareholder abuse : and (iv )

defendants' failure to disclose that they had no reasonable basis to claim that Xethanol coul d

commence local biomass to ethanol production and commercialization in the near-tern .

92 .. First, the SlrcrreSlewh corn report uncovered the fact that defendant Taylor, wh o

had claimed to have gained "global senior corporate executive experience with multinationals"

including renowned corporations such as Reed Elsevier and Northrop Grumman, had neve r

52

worked at either of these corporations . According to SlrareSleuth. corn, upon investigation, bot h

Reed Elsevier and Northrop Grumman could find no information confirming Taylor' s

employment, in any capacity ..

9a . The ShareSleutlr corn report raised the following specific issues related to th e

fabrication of defendant Taylor's resume . In this regard, the ShoreSleuth corn report stated, i n

part, the following :

RESUME QUESTION S

D'Arrrarrrl-Taylor's biography says he worked as an executive for several largecorporations . Slrareslerrtlr searched old newspaper and magazine articles,Trio's Who guides and other archived material and was unable to find anyreferences to him serving in those positions.

An article in Inc. rrrrrgazirre in 198.3 identified him as president of Boles & Co ., a

trading company in San Francisco . It made no men tion of previous executive

positions at Un ilever, Reed Elsevier or Northrop Grumman. Nor did h i5

marriage announcement in the New York Times that same,year.

Sharesleutli bars accounted for d 'Arnaud Taylor's career moves since then, andcrone took hint to any of those companies. So, for the claims in Xethanol's SECfilings to be true, d'Ar►raruf Taylor's ►+~ould have needed to ►rurke his waythrough the executive ranks of all of those companies by a,-e3 7.

Reed Elsevier said its pension and payroll records turned rip no trace of

rl'Arrrrrud Taplor or Christoph er Taylor, as he soriretime .s called hirrrself.

Northrop Grumman said its h ratan-resorrrces department ►vas unable to verifythat d'4nwurl-Taylor had worked for the defense contractor or crrr), of the

"heritage " companies it acquired through mergers and acquisitions . Northop

Grumman noted, however, that it could not say with absolute certainty that

d'Arnaud-Taylor never- worked for the company .

Xethanol declined to provide d'Amaud-Taylor's titles or dates of service at the

firms .

The first mention of rl'Arnaud-Taylor's purported positions with thosecompanies appears in a 1996 SEC,flrrrg,for Continental Orinoco Co ., a pert► rJy-stock company that was pursuing a minerals venture in f/enezrrala D'arnaud-

Taylor was the firm 's chairman and investor relations contact

Sa

SEC . filings show that in July 1996, Continental Orinoco hired a onetimebroker named Cary Chnino as a management consultant . D'Arnaud-Taylorsigned the agreement, which called for Cimino to receive I million shares ofContinental Orinoco stock to advise the company on everything frommanagement and marketing to strategic planning, international activities andshareholder relations ..

Less than three months later , Canino was one of 45 people arrested as part of anationwide sting aimed at cracking down on bribes to stockbrokers . The FBI,which set up a mock brokerage firm as a front for its investigation, alleged thatCimino offered payoffs to its brokers as an inducement to sell 45,000 shares ofContinental Orinoco's stock . The FBI, which taped the conversations, saidCimino offered to pay brokers 40 percent of the transaction price in stock, or- 35percent in cash. Authorities said he followed though on the offer by transferringshares to an account controlled by undercover agents . Although others involved inthe scheme were indicted by a federal grand .jury, the charges against Ciminowere dismissed with little explanation . He was arrested in an even biggercrackdown in 2000, and was charged with offenses that included bribingbrokers and soliciting the murder of a person he thought was cooperating withauthorities. He pleaded guilty and was sentenced to 10 .years in prison .

[Emphasis added . ]

94 . The ShareSlerrlhcorrr report also revealed that - - contrary to the statements mad e

by defendants - - the Company's Hopkinton, Iowa plant was not being refurbished, it had been

all but abandoned and it was thoroughly neglected .. In this regard, this report stated, in part, th e

following :

TESTING?

Exterior of Hopkinton plant Tune 30, 2006 .Many of Xethanol's recent pressreleases say that the company's biotechnology is "currently deployed" at its twoIowa facilities . The compan y Inns characterized its plant in Hopkinton, Ioi+'a asa te.sthed for evaluating potentialfeedstocks and tech nologies

But that statement directly contradicts the company's SE.C filings, which note that

the plant in Hopkinton suspended production in April 2005 . When eve paid rr visitto the operation June .30, ive . found the doors locked, the building dark and noemployees present. A large filtration unit sat on a grassy patch outside theplant, and an air system serving the building sells in obvious disrepair.

D'arnaod-Taylor said in an interview with The Wall Street Transcript in Mai-ellthat the Hopkinton plant was being refurbished "as we speak." But ►ve saw no

54

signs of improvements, and Xethanol',s SEC ,flings shorn that capitalexpenditures in tlie, first quarter were just $ .3$,000

Last week , a Hopkinton city official said plaits to make the plant a test facilityapparently had fallen by the wayside, adding that no public utility services werebeing provided to the building and no Xethanol employees worked there on aregular basis. [Emphasis added. ]

95 In addition to reporting that the Company's Hopkinton, Iowa plant was not being

refurbished, the Shot eSleuth coin report went further to state that the reason this plant was no t

being refurbished was because Xetlranol did not possess the technology necesswy to convert

biomass to ethanol in a commercially viable manner This report also stated that there did no t

appear to be a rational basis behind the Company's claim, on July 20, 2006, that the Compan y

could foreseeably open a 50 million-gallon per year biomass ethanol project in Georgia by mid-

2007, or defendant Taylor's claim that Xethanol would produce .300 to 400 million gallons o f

cellulosic ethanol a year by the spring of 2009.

96 ., In addition to quoting leading experts who compared the commercial viability o f

ethanol as the equivalent of flying to the planet Mars, the report highlighted the fact that lowe n

Corp., the operator of the only large-scale cellulose to ethanol production plant in Nort h

America, had budgeted at least $300 and had projected that its first 50-million gallon facility

could not be completed until at least a year beyond defendants' estimate for Xethanol 1 Th e

ShareSleuth corn report compared logen's large investment at one plant to the grand total o f

$13 .3 .420 and $106,231, X.ethanol had spent in 2005 and 2004, respectively, on its biomas s

ethanol commrierc€alization technologie s

97. In addition to the foregoing, the ShareSleutl7 corn report also highlighted a series

of defendants' omissions, relating to their failure to disclose a web of"related party transaction s

55

and undisclosed interests and entanglements, and the fact that the Company had associated wit h

a group of early investors that had been seriously censured or sanctioned by regulatory agencies .

In this regard, the report stated, in part . the following :

At Xethanol, we discovered that the shareholders whose name s appeared in thecompany 's SEC .filings over the past ,year and a half included !lo fewer" thalreight current or former .stock brokers who have been the subjects of disciplinaryactions ly the Securities and Exchange Commission, the National Association

of Securitie s Dealers or other" regulator , bodies.

One of the live biggest shareholders in Xethanol when it went public last year wasWilliam Scott Smith , who was charged by the SEC in 1995 with defraudinginvestors in a Denver based shell company, called Melbourn e Capital Corp . TheSEC said that Smith installed his nephew and two friends as officers and directorsof Melbourne Capital, and that the group -- at Smith's direction - misused ormisappropriated 70 percent of the $246,000 that the company raised frominvestors . The onetime stockbroker settled the charges in 1996, without admittingor denying guilt . The SEC assessed $256,000 in financial penalties and barredSmith from serving as an officer or director of any public compan y

Xethalrol 's SEC filings refer to hilly as W Scott Smith and do not mention hispast We confirmed that he was the same person by comparing address records,birthdates, Social Security numbers and other identif 'ing information .

[Emphasis added . ]

98 .. The report also exposed other theretofore undisclosed relationships between

Company insiders, including defendant Taylor . and related third parties, or third parties with

very questionable pasts . in part, as ibilows :

A SHARED HISTOR Y

Smith's ownership stake in Xcthanol was not happenstance,

Florida cor"por"ation filings list D 'AI"traud-Taylor and Smith as officers ofLondon Manhattan Limited Inc., the comrlpally that pl "or'Ided e...veclltive-

1IIlI11pg e Ir1G'lrt S'1-vices to XetjrllllUl flYlllt September 2001 to rClllflfll"y 200.5 . The

filings list d'Arnaud-f aylor as president of London Manhattan They list Smith a s

' loges has the major' financial backing of Royal Dutch/Shell Group . Petro-Canada . the CanadianGovernment and Goldman Sachs & Co .

56

vice president and Franz A . Skryanz, another Xethanol officer, as secretary andtreasurer, .

Slrar •esleutlr uncovered a second connection between d'Arnaurf Taylor andSmith dating back to 1996. Their' names appeared together in a suit filed by aNew York doctor who claimed he was defrauded of $.30,000, The doctor allegedthat d'Anaud-Taylor, and Smith participated in a scherne to extract an up-frontfee for business financing that was promised but never materialized . The doctordropped his suit in favor of settlement negotiations . But d'Arnaud Taylor's threeco-defendants later wound rip in prison --- two.far advance fee loan frauds andogle . for laundering moneyfor a drug ring.

Shareslelrth .found that rl'Arnaud-Taylor was more recently a partner in twobusiness ventures €vith ,Andrew Kimmins, a fouler British brokerage e ecutivewho served prison flume for fraud in the 1990s , One of those companies , or its

shareholders, had an early stake in Xethano l

99,. In addition to the foregoing, the S1arneSleuth corn report referred to defendant

"Taylor" as an " International Mail of-Mystery" and reported, in part, the following :

INTERNATIONAL MAN OF MYSTER Y

D'arnaud-Taylor's biography describes him as an international merchant banker .entrepreneur and turnaround specialist who has managed the strategy, operationsand financial affairs of : co€npanies on four continents

But a string of lawsuits stretching from Washington. D .C, to New York andPhoenix paint a somewhat different Picture of Xethanol's 6{}-year-old CEO,whose father was a British diplomat .

In 1992, two of d`Arnaud-Taylor's partners in a financial-Services firm calledLondon Manhattan Co. sued him in federal court in Washington . The partnersclaimed that he and another member of the firm, James V Hackney, weresoliciting money for a private investment fund without their knowledge . The suitalso said d'Arnaud-Taylor and Hackney engaged in other activities that werebeyond the scope of London Manhattan's business, The court file includedcomplaint letters from companies that said they paid d'Arr€aud-Taylor a retainerto secure capital but had not received f=unding nor collected a refund .

The Partners in London Manhattan settled their litigation and parted ways Thetwo who sued kept the company's original name. while d'Arr€laud-Taylor andHackney operated under several variations, including London Manhattan Ltd . andLondon Manhattan Communications

57

The original Londo n Manhattan Co., now based in South Carolina, has noconnection to Xethanol or d'Arnaud -Taylor .

Hackney was indicted on four counts of mail fraud in 1998 . Authorities said hesolicited investment capital from friends and relatives, including his father-in-law,but used the money for his personal use . He was convicted and sentenced to 41months in prison . Hackney corrrtnitted his crimes in late 199.5 and early 1996, atime when he was still a partner in London Manhattan Corrrrrarrrrications,according to descriptions of the firm contained in a pair of SEC Iilings from thatperiod .

The New York doctor who sued d'Amaud-Taylor and three other men allegedthat, in late 1996, d'Aniaud-Taylor posed as someone who was interested inbacking him in a €7 edical-management business. The doctor claimed that thepeople who were supposed to be arranging the financing -- Bruce W . Kitchen andBrian Cook - held out d'Arnar€d Taylor and another man, Franco Nocito . asverified sources of Funding simply to beat a deadline that world have triggered arefund of the doctor's 530.000 retainer . The suit said that William Scott Smithattended the same meeting and misrepresented himself as a willing source of€-norney .

At the tune, Kitchen was already facing charges in Florida in connection with an

advance-free loan scheme. and was on probation in New York fbr running afraudulent car-leasing operation . Nocito had been caught delivering drug cash in

1992 and agreed to cooperate with authorities, He was indicted on under seal on

money-laundering charges in 1994, and was arrested and arraigned in August

1996 . Smith had just settled his case with the SEC .

Kitchen eventually struck a plea bargain in the Florida case He also pleaded

guilty in a federal fraud case in New York in 2000 Those charges grew or€t of his

activities at the financial-services company that was the focus of the doctor's suit .

Kitchen was sentenced to 50 months in prison : and €f'as ordered to pa)' $4.27

million in restitution . Cook also pleaded guilty in the Ne€v York case. He wrrs

sentenced to 18 morltlls in plisvrr and was ordered to pay 5118 million inrestlttitloli.

Nocito pleaded guilty in his money-lauul lering case, ackno ►vled in in his pleaagreement that he I, ul delivered $4.6 million in drug cash .

[Emphasis added . .]

100 While defendants had previously stated that "none of Xethanol's managemen t

were involved with Zen or its business and none of Ze€ 's management or owners are involve d

58

with Xethanol," this also appear to have been false . Again, according to the SlrareSleuth com

report :

SEC,flin s, however , show that Zen's treasurer and chief financial officer,Walter C. Nathan , wound up with 383,333 Xethanol shares irrrrnediately afterthe reverse rrrerger.

Another group of Zen shareholders, hearted by Lawrence M. Underwood,

emerged with 138,974 .Xethrrrrol shares.

Nathan was described in Zen's SEC filings as a Denver insurance salesman and

former real estate developer. Sharesleuth has looked deeper into his past and

identified him as all ex-.stockbroker, who was charged by the NASD in 1987

after two of his clients said the,), were guaranteed rryainst loss as an inducement

to invest $100,000 in two penny stocks . When the value of` the shares fell and the

men asked for the return of their money, they were rebuf'f`ed . The NASD fined

Nathan $5,000 and suspended from association with any me nber fifni for 60

days .

Underwood, too, is a former Denrer stockbroker. He was charged by the NASD

in 1986 with violating; the rules of fair practice by charging evice.ssive markups .He was censured, fined and ordered to disgorge $10,000 ; however, the SEC set

aside the order after Underwood appealed .

[Emphasis addefl

101 . While defendant Taylor had repeatedly defended the reverse merger, by whic h

Xethanol became a public company, as legitimate and stated that this form was not adopted as a

means of avoiding significant disclosure obligations inherent in an initial registration application ,

the SlrareSleulh corn report continued to disclose other early Xethanol shareholders that each ha d

histories of past regulatory action against them, including :

Stanley C . Brooks, chairman of Brookstreet Securities Corp . in Irvine, Calif.Brooks has it long history of fares and disciplinary actions by the NASD andstate regulators.

In Jannuary, he settled compliance-related charges the NASD brought against himand an affiliated brokerage, First Securities USA Inc Brooks did not admit ordeny guilt, but agreed to a two-year ban on serving in any supervisory capacitywith any member firm ..

59

Xethanol filed a registration statement with the SEC last year listing Brookstreetwith 100,000 shares . The riling said Brooks had voting and disposition powerover the shares . Brooks' personal website says he and his wife are the sole ownersof Brookstreet .

Russell W. Newton, chief financial officer of Source Capital Group Inc . inWestport, Conn .

The NASD imposed a $180,000 fine against Newton and a previous firrrr, Aferit

Capital Associates Inc., in 1999 for using brokers known to have been barred

.from the industry . The industry group also suspended Newton for 30 days and

ordered him to retake a qualifying exam .

Neivtorr was Merit's chairman . A joint investigation by the NASD and the Stateof Connecticut found that Newton, on behalf of Merit, paid $167,500 to peoplewho were disqualified from working as registered brokers . The investigation alsofound that Merit representatives in one branch office used sales scripts thatwere materially misleading and made exaggerated and anivarranted claims.

The Utah Division of Securities brought additional charges against Newton and

Merit Capital in 2001, alleging the sale of rrrrregistererl securities, sales fogy

unlicensed agents , failure to supervise and securitie's_fraud, Newton settled the

charges without admitting or denying guilt .. He and Merit were assessed a joint

fine of $25,000 .

According to Xethanol's SEC filings after the reverse merger, Newton owned94,639 shares and had options on an additional 12,187 shares .

Marc K. Swickle and Howard B . Berger, co-founders of 'rofessional TradersFund LLC .

The Washington Division of Securities filed a complaint in Februairy against

Siwicicle, Berger and Professional Traders Fund, alleging that they soldunregistered securities to residents of that state , The agency said it intended to

issue a cease and desist order against the men and the firm . Swicl:le and Berger

have asked for a hearing, so the order remains pending .

Berger settled NASD charges in 2000 related to the alleged "flipping " of shatin the initial public offering of a penny-stock compan y

The complaint charged that he and at least one other person at his brokerageplaced more than 15 percent of the IPO shares with clients, with theunderstanding that the firm would buy them back immediately after the offering .The NASD also charged that Berger [ailed to take steps to prevent unregisteredindividuals from selling securities For his Iinn . or failed to register them .

Berber agreed to pays a $20,000 ,fine . He was suspended from working in a

super visor j7 capacity, for a/n' NASD member fairy , for two,years and suspended

from working in any capacitty.for 120 days ,

60

According to Xethanol's SEC filings after the reverse merger, ProfessionalTraders Fund held 46,153 shares .

Xethanol declined to say how it raised money from investors when it was aprivate company. or whether a particular company or individual acted asplacement agent for the shares .

Nor would the company say how William Scott Smith, who is 76, wound up asone of Xethanol's largest shareholders,

a, =, ;

It was impossible to tell from Xethanol's filings which early shareholdersinvested in the company before it went public, and which bought shares in aprivate placement that accompanied the reverse merger .

Smith reported owning 972,414 shares of Xethanol in an SEC filing in February2005 At the time, that stake amounted to 7 ..3 percent of the company .. Thoseshares would be worth $6,76 million at Friday's closing price .

Smnith's holdings excluded 338,115 additional shares held in the name of ThereseRoos, with whom he has shared addresses in Delray Beach, 171a . . andWesthampton, N ..Y ..

One of Sinit1,',s co-defendants in the old SEC, fraud case also appeared oil th elist of early Xethanol shareholders . A registration statement in October 2005shows Antlro ►rly Skrrlski holrllrr 2,648 sh ares . .An additional 1,766 shares werehe/t1 hi the name s of Skrrlskl 's two ,young cheldr•en . Like Sm aith . Skulski settledthe SEC charges without admitting or denying guilt He agreed to pay $4 .402 andconiniit no Future violations of securities laws .

[Emphasis added . ]

102 The Share .SIeufh corn report also exposed a related party connection betwee n

defendant Taylor and the principles of 1-12Diesel 1nc that also led investors to then question th e

true value of that previously announced contract . According to this report :

SMALL WORLD

SEC filings, corporate records and other documents reviewed by Sharesleuthshow that d'Arnaud-Taylor has a pattern of doing business deals with a thmiliarcircle of associates .

D'Arnaud-Taylor' s biography says he was president of Findex . corr , a developerof religious software , when it went public though a reverse merger in 2000 The

61

person who took over as that company's chairman after the deal was BenjaminMarcovitch .

In August 2003, Xethanol signed a partnership agreement with DDSTechnologies USA Inc., a small, publicly traded company in Boca Raton, Fla .The joint-venture deal called for Xethanol's plant in Hopkinton, Iowa, to installDDS Technologies' "revolutionary" equipment for separating agriculturalproducts and biomass into substances that can be converted into ethanol and otherbyproducts

SEC filings for DDS show that the company's chairman and chief executive at thetime of the deal was none other than Benjamin Marcovitch The filings alsoidentify another of the company's co-founders as Lee S . Rosen. a former stockbroker whose license was suspended by the NASD from October 1998 to April2001 because of his failure to pay an arbitration award to a former employer- .

.ethanol and DDS said in a pr°css release that they expected to process 40 tons

of biomass a day at the Hopkinton plant, starting in early 2004, and that the

sale of end products would generate S .S million in annual operating profits . By

October 2004, the deal between Xethanol and DDS had devolved into a, federal

lawsuit, with DDS claiming in its filings that Xethanol refused to pay for the first

of four- units and refused to give it back Xethanol claimed the equipment did not

work as advertised .

The two companies announced last fall that they had settled their differences ..DDS got its system back, while Xetlianol agreed to buy a new and improvedversion for its Blairstown plant . The companies also agreed that Xethanol wouldbe the exclusive marketer of the equipment to the U ..S ethanol industry

Xethanal said the on inal units did not pe r form as well as expected because ofcalibration issues . The company added that it entered into a new deal with DDSbecause it thought the improved version would give it a competitive advantage,and because it wanted to preclude rivals from getting the systems .

HELLO AGAI N

In April, Xetlranol entered into a par tnership wraith HZDiesel Inc., it new

company headed by Rosen .

H2Diesel had been incorporated seven weeks earlier . It says it has the NorthAmerican, Latin American, Caribbean and African license for a proprietaryadditive used in making biodiesel fuel In a convoluted deal, two investment fundswith stakes in Xethanol bought 325 million shares of I12Diesel's stock for $2million .. H2Diesel issued an additional 2 .6 million shares to Xethanol . which inturn agreed to manage 1-12Diesel's business .

62

The deal gave the investment Funds, Crestview Capital Master LLC and ToibbInvestment LL-C, the right to sell their H2Diesel shares to Xethanol in exchangefor 500,000 shares of Xethanol stock, They exercised that right in April, shortlyafter the agreement was signed. In the end, the investment funds put in $2million and got Xethalrol stock that Xethanol valued at $5.4 million . Thoseshares Were still Worth $3.47 million at the end of last week . Xethanol said in arecent SEC filing that the additional shares it received in the swap brought itsownership stake in H2Diesel to 45 percent .. [Emphasis added ]

103 . Similarly, the ShareSleu/h . coin report also uncovered relationsh ips between

certain Company insiders, including defendant Taylor, and third parties that were purporting to

be doing business or entering into new contracts with Xethanol, In this regard, the repor t

focused on delendants' recent announcement of its expansion and Phase 11 development and

stated, in part, the followin :

NEW PARTNER S

Xethanol has a joint velrtrtre agreement with Coastal Energy Development Inc,,a newly formed co►rrpant' in Savannah, Ga., to develop its ethanol plant inAugusta, as well as additional plants . The agreement calls for Coastal to locatesites and secure funding I"ar~ the plants . .

Coastal Energy's president is Chandler Hadlock, a 30 year-old West Point

graduate who has spent most of his adult life in the military . According to a

story that appeared in January in the Atlanta Business Chronicle . Coastal Energy

and Xethanol are getting help in the funding search horn Epiphany Partners Inc ..,

described as a Savannah-based merchant bank .

Florida corporation records shot, that two of the .founders of EpiphanyPartners were previously iii vohved in a separate venture with d'Arnaud-Taylorand Kimmins, the forlner British brokerage boss. The records, for a co111pa11lJ

called Trafalgar Resources Inc., listed Taylor as chairman and Kunm11rs aschief operating officer.

Delrvarefranchise tax records also link rl'Arnaud-Tay/or and Kimmins at a

Company called Xelnintw Inc. Kimmins ►vas listed as Xe,n nei'c president in a

filing oil Feb 2.5, 2005, just a few ► veeks after Xethanol completed its reverse

merge! . .Although he did not elfint tire!! : at that there, rl'Arnaud-Taylor laterreported beneficial ownership of 426,588 .ethanol shares held b.), Xelninex . He

said in an SEC riling that the shares were contributed through a settlement among

the shareholders of Xerninex

.63

One of the founders of Epiphany Par tners , John J Murphy Jr, appears in theFlor ida corporation flings .for London Manhattan Limited Inc., the compailythat provided managerrrent services to Xe tharlol A document in April 2002 lists

him as a director of the company, ivitlr William Scott Smith as president.

[Emphasis added . ]

104. In response to this all out assault on the Company, on August 10, 2006 .

defendants prepared and published a release headlined, "Xethanol Responds to SharcSleuth corn

Posting." The Company's anemic response did little to rebut the allegations raised by the

ShareSleuih .cor report or to assuage investors' concerns .. As evidence of this, on August 10,

2006, after, declining frorri a high of $8 .00 on August 7, 2006 to a close of $5,25 on August 9 ,

2006, shares fell further still - - to a low of $4 .21 per share .

105. In fact, on August 18 and 19 . 2006. shares of the Company closed at below $5 .0 0

on both days, following TheSireet corn's publication, on August 17, 2006. of its report title d

"'Gaping Holes' at Xethanol." In addition to reiterating many of the same issues raised in th e

ShcrreSleuth corn report, TheSlreet corn report also highlighted lames Stewart's true experience ,

further shocking investors by revealing. in part , that :

Meanwhile. controversy over the stock continues to rage .

Fans still love Xethanol because . based on its press releases and regulatory filings,the company could soon become the first big player in the so-called biomass-to-ethanol business . But skeptics wonder .

At least one Xethanol holder . private investigator Michael Ferrari of Pleasanton ..Calif, counts himself aniong the doubters . Ferrari says he was hired by an elderlywoman who bought the stock and then grew concerned about the company . Hepurchased some of the stock from her and then bought put options -- whichbecome valuable if the stock falls -- to limit his exposure .

"I'm sure you have heard the investigator credo : 'A coincidence is Just acoincidence, until there are too many coincidences,"' Ferrari says "1n my 21-yearcareer . this is the longest string of coincidences I have ever encountered orstudied . "

Xethanol's stock, which fetched more than $15 a share at its peak, tumbled 6 .2%

to $4 .66 on Wednesday,

64

'Key Employees '

At this point, sharesleuth cord has already raised a number of troubling questions .

Perhaps most notably, the blon found no evidence .supporting .Xetharrol's claimsthat its CEO held e ecmtive positions at the big-name corporations listed in hisofficial bin. Nor could it .fnd any reason to believe that Xetlrnrrol will be turning,waste into ethanol by next year, as it promises. After all, bigger players like thefederal government are still struggling to do so, and one of Xethnrrol's twoethanol plants r•emairrs idled.

TheStreet . com recently set out to learn more about Xethanol's business operationsand the plant managers who supposedly run they .

Aside from named executives , Xethanol lists two "key employees" in regulatoryfilings, The first is Jarrres Stewart, a corporate vice president who runs the onecompany plant that actrrallp operates , Based on that filial;, Stewart "has morethan 2.3 years of experience in ethanol production in the United States andthroughout the world. "

But the Business Record, a local publication in Iowa, has painter! Stewart as a

regular sort of guy. The article says that Stewart , a cattle producer by trade,

hatched the idea . for a far•mer•-owned ethanol plant after viewing a government

video in the rrrirl-1990s, In the interview , Stewart told the newspaper thatfarmers got interested in the idea -- and pitched in $5,000 worth of corn each toinvest -- while "speaking the entire time with a toothpick protruding frorrr his

mouth. "

The plant ran into trouble and shut rlowrr a couple of gears after that star-t ,

appeared. In 2004, The Gazette of Cedar Rapids reported the bank finally soldthe plait at auction to .Xethanol -- the onlj' bidder -- for a hit more than its $ .5.3

million asking price .

Today, that corn-based ethanol plant serves as Yethanol:s only source of

operating revenue. Based on its r"egulator'yy filin s, the company, last yeargenerated $4.34 million in sales -- enough to cover the $3.3 million spent on

setting tip a new corporate I eadgrrrrrters, but ver), little else. The companyended the year $11.4 million in the red.

[Emphasis added . ]

106 .. TheStreet .coni also reported on the state of the Company's Hopkinton, Iow a

plant, adding the following to the ShrrreSleuth com report, including that :

65

Idled Plants

.ethan ol's other' ethanolplant -- described by charesleuth .corn as dark, empty and

"in obvious disrepair" -- reportedly has no utilities , let alone a manager or staff.So it remains unclear exactly what the company's second "key employee" does .

In its regulatory filings, Xetbanol lists David Kreitzer as its vice president ofbusiness development. The company says that Kreitzer "has worked in every area ofethanol production" and highlights his role as past president of Gopher State Ethanolin particular' ,

As recently as May . Kreitzer seemed to still be in charge of that company .. An article

published by the Star-Tribune of St . Paul, Minn., specifically names Kreitzer as the

property manager of Gopher State Ethanol -- a bankrupt ethanol plant that onceoperated inside a historic brewery . The plant shut down in .2004, the Star-Tribune

reported, after nearby residents sued over its noise and smell ., Those neighbors seem

unhappy with the facility still .

"Neighbors became worried when they, saw gaping holes in several buildings after

the owners removed pieces of equipment," the Star-Tribune reported in May."Kreitzer said that some of the 'openings' were pre existing, and that he isn'tinclined to alter 'the historic portions of the property. ~ ► r

Based on his testimony before the St. Paul City Council, Kreitzer seems to be

bluntingfor a buyer instead . . .

[Emphasis added . ]

107 . The unexpected departure of defendant Taylor from the Company, announced o n

or about August 22, 2006. only served to strengthen investors ' belief that the information

contained in the ShareMeuth corer and TheStreel .com reports were true and accurate The

appointment of Louis Bernstein to the position of CEO, however, did little to reassure investors ,

because defendants again failed to reveal the connections between Bernstein and the Company .

108 . Accordingly, the day after defendants announced the elevation of Bernstein t o

CEO . S1rcureSlewh coin issued a follow-up report that stated, in part, the following :

A standard background check shows that Beimstein has been a Xethanoldirector since .June 2005 . a few months after the company went public through a

reverse merger with Zen Pottery Equipment Inc . of Denver . He recently retiredi:rorn Pfizer after 30 years of service .

66

Bernstein also is a director at United Energy Corp ., a New Jersey company thatsells specialty chemicals used in oil and gas production, photo finishing and other-fields .. He joined its board in September 2003 ,

A check of'United Energy 's SEC.frlings .shmvs that five people connected to thatcompanJY also have ties to Xethanol .

United Energy's 10-K filing dated ,July 29, 200 .3 lists Jeffrey S. Langber ; as thecompany's director of marketing . The report said he held the position under aone-year contract It described him as a self' employed consultant and investmentbanker . . United Energy said Wednesday that Langherg no longer works there .

Langberg more recently has been a consultant to Xethanol, as well as a directorand a major shareholder. The company's SEC filings describe lei€ri as anindependent investment banker, who has advised d'Arnaud-Taylor since 1999 .La€7gberg resigned his board seat at Xethanol in June . The annual report thecompany filed on March i 1 said he and his spouse controlled nearly 1 .14 millionshares of its stock .

Xetllanol 's earlier SEC filings show that United Energ}y's chairman and chief

e ecutive, Ronald Wilen, also €vas a Xethanol shareholder, A registration

statement last October listed him with 131421 shares ., The same document lists

Martin Rappaport, a United Energy director, as holding 132,421 shares ,

The registration statement lists Joseph J . Grano .Jr, as holding 50,000 shares .Grano is the former chairman and chief executive of UBS PaineWebber Inc . andserves on Xethanol's advisory board. United Energy's most recent annual filingwith the SEC lists Grano as holding 1 .6 million of its shares, plus l .33 millionwarrants .. That stake, including the warrants, amounted to 9 .1 percent of the sharesoutstanding .

[Emphasis added . .]

109, As the dust settled on Xethanol . and as investors digested the full significance of

these belated disclosures, shares o1 the Company traded even lower in the days and weeks that

followed . Accordingly, by September 26, 2006, shares of Xethanol traded to an inter-day low of

$2 .58 per share - - a decline of almost 65% from August 8, 2006, and a decline of almost 85%

compared to the Class Period trading high of over $16 .00 per share reached in € lid-April 2006 .

1 10 . The market for X.ethanol's common stock was open. well-developed and efficient

at all relevant times .. As a result of these materially false and misleading statements and failures

to disclose, Xethanol common stock traded at artificially inflated prices during the Class Period ..

67

Plaintiff and other members of the Class purchased or otherwise acquired Xethanol common

stocking upon the integrity of the market price of Xethanol common stock and marke t

information relating to Xethanol, and have been damaged thereby .

1IL During the Class Period, defend ants materially misled the investing public ,

thereby inflating the price of Xethanol common stock by publicly issuing false and misleadin g

statements and omitting to disclose material facts necessary to make defendants' statements, as

set forth herein, not false and misleading .. Said staters ents and omissions were materially fals e

and misleading in that they failed to disclose material adverse information and misrepresented

the truth about the Company, its business and operations, as alleged herein ..

112 .. At all relevant times, the material misrepresentations and omissions particularize d

in this Complaint directly or proximately caused or were a substantial contributing cause of th e

damages sustained by plaintiff` and other members oil the Class . As described herein, during the

Class Period, defendants made or caused to be made a series of materially false or misleadin g

statements about Xethanol's business, prospects and operations . These material misstatements

and omissions had the cause and effect of creating in the market an unrealistically positive

assessment of Xethanol and its br€siness, prospects and operations, thus causing the Company" s

common stock to be overvalued and artificially inflated at all relevant tines . Def'endants '

materially false and misleading statements during the Class Period resulted in plaintiff and othe r

members of the Class purchasing the Company's common stock at artificially inflated prices .

thus causing the damages complained of herein .

CAUSATION AND ECONOMIC LOS S

1 13' . During the Class Period, as detailed herein . defendants engaged in a scheme t o

deceive the market, and a course of conduct that artificially inflated Xethanol's stock price an d

68

operated as a fraud or deceit on Class Period purchasers of Xethanol's stock by misrepresenting

the Company's true operational condition Over a period of approximately seven months,

defendants deceived investors and improperly inflated the Company's share price . Ultimately,

however, when defendants' prior misrepresentations and fraudulent conduct cane to be revealed

and was apparent to investors, the price of Xethanol shares declined precipitously - - evidence

that the prior artificial inflation in the price of Xethanol's shares was eradicated . As a result of

their purchases of Xethanol stock during the Class Period, plaintiff and other members of the

Class suffered economic losses, i . e damages under the federal securities law s

114 By improperly characterizing the Company and omitting to disclose critical fact s

about the Company, its managers and its early-stage investors, defendants presented a misleading

image of the Company and its near-term future growth prospects . During the Class Period,

defendants repeatedly emphasized the ability of the Company to cominercialilze biomass ethanol

in the foreseeable near-term and consistently reported deals with independent third-parties . At

all times, defendants also stated that defendant Taylor had the experience and skills necessary to

lead Xethanol to profitability and success . These claims caused and maintained the artificial

inflation in Xethanol's stock price throughout the Class Period, and until the truth about the

Company was ultimately revealed to investors ,

115 . Defendants' False and materially misleading statements had the intended effect of

causing Xethanol's shares to trade at artificially inflated levels throughout the Class Period . As

evidence of this, during the Class Period, Xethanol shares reached a trading high of over $ 15,00

per share in late-April 2006 .

1 16 On August 8, 2006, however, investors learned of the ShareSlerrtlr coax report and

realized that: (i) defendant Taylor had probably firbric,ated his resume . misrepresenting the fact

69

that he had significant work and management experience at major U .S . corporations; (ii)

defendants misrepresented the true state of Xethanol's Hopkinton, Iowa plant, That plant wa s

not currently being ref€rrbished or updated and it did not even have running water or sewe r

service at that time, (iii) defendants omitted to disclose a host of related party transactions, a s

well as associations with several early stage investors that had alarming records of stock fraud ,

market manipulation, breach of fiduciary duty and shareholder abuse ; and (iv) defendants faile d

to disclose that they had no reasonable basis to claim that Xethanol could commence loca l

biomass to ethanol production and commercialization in the near-tern . These belate d

disclosures had an immediate, adverse impact on the price of Xethanol share s

117 These belated revelations also evidenced defendants' prior falsification o f

Xethanol's business prospects due to def'endants' false statements As investors and the market

ultimately learned, the Company's prior business prospects had been overstated and the costs

necessary to commercialize biomass ethanol had been severely understated .. As this adverse

information became known to investors, the prior artificial inflation began to be eliminated fro m

Xethanol's share price, and these investors were damaged as a result of the related share pric e

decline ..

118 . As a direct result of the publication of the ShcrreSlewh coin report on August 8 ,

2006, Xethanol's stock price collapsed - - falling almost 50% within the three trading days

following the report's publication . This dramatic share price decline. eradicated much of the

artificial inflation from Xethanol's share price, causing real economic loss to investors wh o

purchased this stock during the Class Period .. In s€ ni, as the truth about defendants' fraud an d

illegal course of conduct became known to investors, and as the artificial inflation in the price o f

70

Xethanol shares was eliminated, plaintiff and the other members of the Class were damaged ,

suffering an economic loss of at least several dollars per share ,

119. The decline in Xetl anol's stock price at the end of the Class Period was a direc t

result of the nature and extend of'defendants' fraud being revealed to investors and to the market .

The timing and magnitude of Xethanol's stock price decline negates any inference that the losse s

suffered by plaintiff and the other members of the Class was caused by changed marke t

conditions, macroeconomic or industry factors or even Company-specific facts unrelated t o

defendants' fraudulent conduc t

120. During the same period in which Xethanol's share price fell over 50% as a resul t

of defendants fraud being revealed, the Standard & Poor's 500 securities index was relativel y

unchanged .. The economic loss, i. e damages suffered by plaintiff and other members of th e

Class, was a direct result of defendants' fraudulent scheme to artificially inflate the price o f

Xethanol's stock and the subsequent significant decline in the value of the Company's share s

when defendants' prior misstatements and other fraudulent conduct was revealed .

ADDITIONAL SCIENTER ALLEGATIONS

121 . As alleged herein, defendants acted with scienter in that each defendant knew tha t

the public documents and statements issued or disseminated in the name of the Company were

materially false and misleading ; knew that such statements or documents would be issued o r

disseminated to the investing public : and knowingly and substantially participated or acquiesce( [

in the issuance or dissemination of such statements or documents as primary violations of th e

federal securities laws, As set forth elsewhere herein in detail, defendants, by virtue of thei r

receipt of iniorrnation reflecting the true facts regarding Xethanol, their control over, and/o r

receipt and/or modification of Xethanol's allegedly materially misleading misstatements and/or

71

their associations with the Company which made them privy to confidential proprietar y

information concerning Xethanol, participated in the fraudulent scheme alleged herein .

122, Defendants were motivated to materially misrepresent to the SEC and investor s

the true operational condition of the Company because : (i) it allowed defendants to artificiall y

inflate the price of Company shares ; (ii) it enabled defendants to register for sale with the SEC ,

pillions of shares of Company stock held by insiders and/or defendants and also allowed th e

Company to raise over $45 million through the private sale of equity, both while in possession o f

material adverse non-public information about Xethanol ; (iii) it allowed certain insiders ,

including defendants Taylor and Langberg to liquidate millions o1' dollars of their personally hel d

Xethanol shares, also while in possession of material adverse non public information about th e

Company ; and (iv) caused investors to purchase or acquire shares of Xethanol stock a t

artificially inflated prices .

123 . Accordingly, during the Class Period, Company insiders raced to the market t o

liquidate significant amounts of their personally held Xethanol shares while in possession o f

material adverse non-public information about the Company, as follows :

INSIDER I DATE E4/12/2006

SHARES100,000

TRANSACTIONSate at 12 33 per share

VALUE 1$ 1 .233,000

2/24/2006 4 ,000 Sale at $5 .32 per share $21,280Christopher

D'arnaod-Taylor2/23/2006 6 ,770 Sale at $5 33 to $5.35 per share $36,000

2/22/2006 11,230 Sale at $5 .32 to $5,47 per share $61 .000

Jeffery S ..l_,angberg

2/21/200 6

4/12/2006

2/21/2006

3 .000

105,00 0

25 . 000

Sale at $5 30 per share

Sale at $ 12.19 per share

Sale at `5 .52 per share

$15,900 [

$ 1,279 , 950

$138.000

72

124. In addition to the foregoing, in late-December, 2005, immediately prior to th e

inception of the Class Period, defendants also registered for sale over 19 .765 million shares o f

Company stock, each share of wh ich was eligible for resale during the Class Period by certai n

officers, directors and parties related to the Company .. This registration also included hundreds

of thousands of additional shares that were owed by entities controlled by defendants or famil y

members related to there . These shares, which may or, nmay not also have been liquidated durin g

the Class Period, include in part, the following :

NAME

Beneficia lOwnership

Prior toOffering

SharesRegisteredin Offering

BeneficialOwnershipFollowin gOffering

Lawrence S. Bellone 916,680 566,681 350.000

Bresner Partners Ltd. (L.angberg) 1,103 .512 1,103,512 0

Brook-street Securities Corp . (Brooks) 100.000 100,000 0

Susan Danehower (Taylor) 1,641,610 757,450 884,160

Richard Ditoro 48.828 8.282 40,000

Jeffrey S. Langberg 1,162,595 100 1,162,495

Kelly Langberg 1,162,595 58.983 1,103,61 2

Robert & Carol Lehman 882 .810 882 . 810 0

London Manhattan Limited Inc 12,539 12,539 0

London Manhattan Securities Inc. 318 .088 318.088 0

Ben Marcovitch (H?Deisel) 135,000 135.000 0

Professional Traders Fund LLC 46,153 46,153 0

Jed Schutz 844,510 417,349 144,663

73

Franz A. Skryanz 86,515 86,51 .5 0

Anthony Skulski 2,648 2,648 0

Jacob Skulski 883 883 0

Lillian Skulsld 883 883 0

W. Scott Smith 972.414 919,446 52,968

Christopher d"Arnaud-Taylor 1,641,610 7,062 1,634,54 8

Michael Underwood 25,000 25,000 0

Underwood Family Partners, Ltd. 1 1 3 .974 1 13 .974 0

Xeminex Inc. (Taylor) 426.588 426 .588 0

Xtraction Technologies LLC (Taylor) 132.422 132,422 0

Applicability of Presumption Of Reliance :

Fraud-On-The-Market Doctrin e

125 . At all relevant ti€nes , the market #ur Xethanol's common stock was an efficien t

market for the following reasons, among others :

(a) Xethanol's stock met the requirements for listing, and was listed an d

actively traded on the AMEX national r Market exchange. a highly efficient and automated

mmlarket ;

(h) As a regulated issuer . Xethanol filed periodic public reports with the SE C

and the AMEX :

(c) Xethanol regularly cox municated with public investors via established

market communication mechanisms, including through regular dissenlinations of press release s

on the national circuits of major newswire services and through other wide-ranging publi c

74

disclosures, such as communications with the financial press and other similar reporting services ;

and

(d) Xethanol was followed by several securities analysts employed by majo r

brokerage firm(s) who wrote reports which were distributed to the sales force and certai n

customers of their respective brokerage firm(s) . Each of these reports was publicly available an d

entered the public marketplace .

126 . As a result of the foregoi€ng, the market for Xetha€lol securities promptly digested

current i €lf6miatio€1 regarding Xethanol from all publicly available sources and reflected suc h

information in Xethanol stock price Under, these circumstances , all purchasers of Xethanol

common stock during the Class Period suf`tered similar injury through their purchase of'Xethano l

common stock at artificially inflated prices and a presumption of reliance applie s

NO SAFE HARBO R

127 . The statutory safe harbor provided for forward-looking statements wider certain

circumstances does not apply to any of the allegedly false statements pleaded in this complaint .

Many of the specific statements pleaded herein were not identified as "'forward-lookin g

statements" when made . To the extent there were any forward-looking statements . there were no

meaningful cautionary statements identifying importan t factors that could cause actual results to

differ materially Prom those in the purportedly lorwaid- looking statements . Alternatively, to the

extent that the statutory safe harbor does apply to any forward-looki€ g statements pleaded

herein, defendants are liable for those false forward-looking statements because at the time eac h

of those forward-looking statements was made, the particular speaker knew that the particula r

forward-looking statement was false . and/or the forward-looking statement was authorize d

75

and/or approved by an executive officer of Xethanol who knew that those statements were fals e

when made .

BASIS OF ALLEGATIONS

128 . Plaintiff has alleged the following based upon the investigation of plaintiff' s

counsel , which inc luded a review of SEC filings by Xethanol, as well as regulatory filings and

reports, securities analysts' reports and advisories about the Company, press releases and othe r

public statements issued by the Company, and media reports about the Company, and plaintif f

believes that substantial additional evidentiary support will exist for the allegations set fort h

herein after a reasonable opportunity for discovery .

FIRST CLAI M

Violation Of Section 19(b) OfThe Exchange Act And Rule 10b- 5

Promulgated Thereunder Against All Defendant s

129. Plaintiff repeats and realleges each and every allegation contained above as i f

fully set forth herein .

130 . During the Class Period , defendants carried out a plan , scheme and course o f

conduct which was intended to and, throughout the Class Period . did : (i) artificially inflate th e

price of Company shares ; (ii) enable defendants to register for sale with the SEC, 111111101s of'

shares of Company stock field by insiders and/or defendants and also allow defendants to rais e

over $45 million through the private sale of equity, each while in possession of material advers e

non-public information abort Xethanol ; (iii) enable certain insiders . including defendants Taylo r

and Langberg, to liquidate millions of dollars of their personally field Xethanol shares, also whil e

in possession of material adverse non public information about the Company ; and (iv) cause

investors to purchase or acquire shares of Xethanol stock at artificially inflated prices . I n

76

furtherance of this unlawful scheme, plan and course of conduct, defendants, Jointly an d

individually (and each of them) took the actions set forth herein .

13 1 . Defendants (a) employed devices, schemes, and artifices to defraud ; (b) made

untrue statements of material fact and/or omitted to state material facts necessary to make th e

statements not misleading ; and (c) engaged in acts, practices, and a course of business whic h

operated as a fraud and deceit upon the purchasers of the Company's common stock in an effor t

to maintain artificially high market prices for Xethanol's common stock in violation of Sectio n

10(b) of the Exchange Act and Rule 10b-5 . All defendants are sued either as primar y

participants in the wrongful and illegal conduct charged herein or as controlling persons a s

alleged below .

1 32. Defendants, individually and in concert, directly and indirectly, by the use, mean s

or instrumentalities of interstate commerce andlor of the mails, engaged and participated in a

continuous course of conduct to conceal adverse material information about the business ,

operations and future prospects of Xethanol as specified herein .

153 These defendan ts employed devices, schemes and artifices to defraud, while in

possession of material adverse non-public information and engaged in acts, practices, and a

course of conduct as alleged herein in an effort to assure investors of Xethanol's value and

performance and continued substantial growth . which included the making of, or the

participation in the making of, untrue statements of material facts and omitting to state materia l

facts necessary in order to make the statements made about Xethanol and its business operation s

and future prospects in the light of the circumstances under which they were made, no t

misleading, as set forth more particularly herein, and engaged in transactions, practices and a

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course of business which operated as a fraud and deceit upon the purchasers of Xethano l

common stock during the Class Period ..

1 .34 . Each of the Individual Defendants' primary liability, and controlling perso n

liability. arises from the following facts: (i) the Individual Defendants were high-level executive s

and/or directors at the Company during the Class Period and members of the Company' s

management team or had control thereof; (ii) each of these defendants, by virtue of hi s

responsibilities and activities as a senior offi cer and/o r director of the Company was privy to and

participated in the creation, development and reporting of the Company's internal budgets, plans ,

projections and/or reports ; (iii) each of-these defendants enjoyed significant personal contact an d

familiarity with the other defendants and was advised of and had access to other members of th e

Company's management team, internal reports and other data and information about th e

Company's finances, operations, and sales at all relevant times ; and (iv) each of these defendants

was aware of the Company's dissemination of information to the investing public which they

knew or recklessly disregarded was materially false and misleading ..

135 .. The defendants had actual knowledge of the misrepresentations and omissions of

material facts set forth herein, or acted with reckless disregard 6or the truth in that they failed t o

ascertain and to disclose such facts . Such defendants' material misrepresentations and/or

omissions were done knowingly or, with recklessly for the purpose and effect of concealin g

Xethanol's operating condition and future business prospects from the investing public an d

supporting the artificially inflated price of its common stock,, As demonstrated by defendants '

overstatements and misstatements of the Company' s business , operations and earnings

throughout the Class Period . defendants, if they did not have actual knowledge of the

misrepresentations and omissions alleged, were reckless in failing to obtain such knowledge b y

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recklessly refraining from taking those steps necessary to discover whether those statement s

were false or misleading .

136. As a result of the dissemination of the materially false and misleading informatio n

and failure to disclose material facts, as set forth above, the market price of Xethanol commo n

stock was artificially inflated during the Class Period, In ignorance of the fact that market price s

of Xethanol's publicly-traded common stock were artificially inflated, and relying directly o r

indirectly on the false and misleading statements made by defendants, or upon the integrity of th e

'market in which the securities trade, and/or on the absence of material adverse information tha t

was known to or recklessly disregarded by defendants but not disclosed in public statements b y

defendants during the Class Period, plaintiff and the other members of the Class acquire d

Xethanol common stock during the Class Period at artificially high prices and were damage d

thereby .

137 . At the time of said misrepresentations and omissions . plaintiff and other member s

of the Class were ignorant of their falsity, and believed them to be true Had plaintiff and th e

other members of the Class and the marketplace known the truth regarding the problems tha t

Xethanol was experiencing, which were not disclosed by defendants, plainti IT and other members

of the Class would not have purchased or otherwise acquired their' Xethanol common stock, or, i f

they had acquired such common stock during the Class Period, they would not have done so a t

the artificially inflated prices which they paid .

138 . By virtue of the foregoing, defendants have violated Section 10(b) of th e

Exchange Act, and Rule I Ob-5 promulgated thereunder

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13' 9, As a direct and proximate result of defendants' wrongful conduct, plaintiff an d

the other members of the Class suffered damages in connection with their respective purchases

and sales of the Company's common stock during the Class Period .

SECOND CLAI M

Violation Of Section 20(a) OfThe Exchange Act Against Individual Defendant s

140. Plaintiff repeats and realleges each and every allegation contained above as i f

fully set forth herein ..

141 The Individual Defendants acted as controlling persons o1' Xethanol within th e

meaning of Section 20(a) of the Exchange Act as alleged herein By virtue of their high-leve l

positions, and their ownership and contractual rights, participation in and/or awareness of th e

Company's operations and/or intimate knowledge of the false financial statements filed by th e

Company with the SEC and disseminated to the investing public, the Individual Defendants ha d

the power, to influence and control and d id influence and control . directly or indirectly, th e

decision-making of the Company, including the content and dissemination of the various

statements which plaintiff contends are false and misleading ., The Individual Defendants wer e

provided with or had unlimited access to copies of the Company's reports . press releases . public

filings and other statements alleged by plaintiff to be misleading prior to and/or shortly afte r

these statements were issued and had the ability to prevent the issuance of the statements o r

cause the statements to be corrected .

142 . In particular, each of these defendants had direct and supervisory involvement i n

the day-to-day operations of the Company and, therefore, is presumed to have had the power to

control or influence the particular transactions giving rise to the securities violations as allege d

herein, and exercised the same ..

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143, As set forth above, Xethanol and the Individual Defendants each violated Sectio n

10(b) and Rule I Ob-S by their acts and omissions as alleged in this Complaint, By virtue of thei r

positions as controlling persons, the Individual Defendants are liable pursuant to Section 20(a) o f

the Exchange Act. As a direct and proximate result of defendants ' wrongful conduct , plaintiff

and other members of the Class srrff~red damages in connection with their purchases of the

Company's common stock during the Class Period .

WHEREFORE, plaintiff prays for relief and judgment, as follows :

A .. Determining that this action is a proper class action, designating plaintif f

as Lead Plaintiff and certifying plaintiff as a class representative under Rule 23 of the Federa l

Rules of Civil Procedure and plaintiff's counsel as Lead Counsel ;

B. Awarding compensatory damages in favor ofplaintiff and the other Clas s

members against all defendants, jointly and severally, for all damages sustained as a result o f

defendants' wrongdoing, in an amount to be proven at trial, including interest thereon;

C . Awarding plaintiff and the Class their reasonable costs and expense s

incurred in this action, including counsel fees and expert fees ;

D . Awarding, extraordinary , equitable and/or injunctive relief as pemlitted by

law, equity and the federal statutory provisions sued hereunder, pursuant to Rules 64 and 65 an d

any appropriate state law remedies to assure that the Class has an effective remedy ; and

E. .. Such other, and further relief as the Court may deem just and proper .

JURY TRIAL DEMANDE D

PlaintilThereby demands a trial by .jr,ry

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Dated : October 2 3 , 2006

KAHN GAUTH.IER SWICK, LL C

Michael A Swick (MS-9970)Kim F . Miller (KM-6996)114 E,39"' St .,New York. New York 10016Telephone : (917) 439-5952Facsimile : (504) 45 .5-149 8

KAHN GAUTHIER SWICK, LLCLewis S . Kah n650 Poydras Street - Suite 2150New Orleans, LA 70130Telephone : (504) 4.55-14001=acsimile : (504) 455-149 8

Attorneys for Plaintiff

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