PEIX

Pacific Ethanol, Inc.

Our financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As a result of ethanol industry conditions that have negatively affected our business, we do not currently have sufficient liquidity to meet our anticipated working capital, debt service and other liquidity needs in the very near-term. We have suspended operations at three of our four ethanol production facilities due to market conditions and in an effort to conserve capital. We have also taken and expect to take additional steps to preserve liquidity. However, despite any additional cost-saving steps we may take, we believe that we have sufficient working capital to continue operations only until approximately April 30, 2009 at the latest unless we successfully restructure our debt, experience a significant improvement in margins and obtain other sources of liquidity.

We are in default under our construction-related term loans in the aggregate amount of approximately $230 million and under Kinergy’s revolving line of credit as well as $31.5 million in notes payable to another lender. In February 2009, we entered into forbearance agreements with each of the lenders, which were amended in March 2009, under which the lenders agreed to forbear from exercising their rights until April 30, 2009 absent further defaults. Although we are actively pursuing a number of alternatives, including seeking to restructure our debt and seeking to raise additional debt or equity financing, or both, there can be no assurance that we will be successful. If we cannot restructure our debt and obtain sufficient liquidity in the very near term, we may need to seek to protection under the U.S. Bankruptcy Code.
Business Overview

Our primary goal is to be the leading marketer and producer of low carbon renewable fuels in the Western United States.

We produce and sell ethanol and its co-products, including wet distillers grain, or WDG, and provide transportation, storage and delivery of ethanol through third-party service providers in the Western United States, primarily in California, Nevada, Arizona, Oregon, Colorado, Idaho and Washington. We have extensive customer relationships throughout the Western United States and extensive supplier relationships throughout the Western and Midwestern United States.

Our customers are integrated oil companies and gasoline marketers who blend ethanol into gasoline. We supply ethanol to our customers either from our own ethanol production facilities located within the regions we serve, or with ethanol procured in bulk from other producers. In some cases, we have marketing agreements with ethanol producers to market all of the output of their facilities. Additionally, we have customers who purchase our co-products for animal feed and other uses.

According to the United States Department of Energy, or DOE, total annual gasoline consumption in the United States is approximately 140 billion gallons. Total annual ethanol consumption represented less than 7% of this amount in 2008. We believe that the domestic ethanol industry has substantial potential for growth to initially reach what we estimate is an achievable level of at least 10% of the total annual gasoline consumption in the United States, or approximately 14 billion gallons of ethanol annually and thereafter up to 36 billion gallons of ethanol annually under the new national Renewable Fuel Standards, or RFS, by 2022.

In addition, we own a 42% interest in Front Range Energy, LLC, or Front Range, which owns a facility located in Windsor, Colorado, with annual production capacity of up to 50 million gallons. We also intend to either construct or acquire additional production facilities as financial resources and business prospects make the construction or acquisition of these facilities advisable.
The ethanol industry has experienced significant adverse conditions over the course of the last 12 months, including prolonged negative operating margins. We, too, have experienced these adverse conditions as well as severe working capital and liquidity shortages, and in response to such conditions, we have reduced production significantly until market conditions resume to acceptable levels and working capital becomes available. We first reduced production in December 2008 and continued to reduce production through the first quarter of 2009. Currently, we have ceased production at our Madera, Magic Valley and Stockton facilities. We continue to operate our Columbia and Front Range facilities. We continue to assess market conditions and when appropriate, provided we have adequate available working capital, we plan to bring these facilities back to operation.

We intend to reach our goal to be the leading marketer and producer of low carbon renewable fuels in the Western United States in part by expanding our relationships with customers and third-party ethanol producers to market higher volumes of ethanol, by expanding our relationships with animal feed distributors and end users to build local markets for WDG, the primary co-product of our ethanol production, and by expanding the market for ethanol by continuing to work with state governments to encourage the adoption of policies and standards that promote ethanol as a fuel additive and transportation fuel.