SECOND FORBEARANCE AGREEMENT

This SECOND FORBEARANCE AGREEMENT (LYLES UNITED) (“this Agreement”) is entered into as of March 30, 2009, by and among PACIFIC ETHANOL, INC., a Delaware corporation (the “Company”), PACIFIC AG. PRODUCTS, LLC (“PAP”), PACIFIC ETHANOL CALIFORNIA, INC. (“PECA”; together with PAP and the Company, the “PE Parties”, and each a “PE Party”), LYLES UNITED, LLC, a Delaware limited liability company (the “Lender”), and LYLES MECHANICAL CO., a California corporation (“Lyles Mechanical”), as parties to the Loan Documents or the Lyles Mechanical Note or both.  The Company, PAP, PECA, Lyles Mechanical and Lender are sometimes referred to individually as a “Party” and collectively as the “Parties” herein.  Capitalized terms used in this Agreement which are not otherwise defined herein shall have the meanings given such terms in the First Forbearance Agreement (defined below) or, to the extent the First Forbearance Agreement does not define such terms, in the Loan Documents (defined below).

WHEREAS, Lender and the PE Parties are parties to that certain Forbearance Agreement (Lyles United), dated as of February 26, 2009 (the “First Forbearance Agreement”);

WHEREAS, the Note became due and payable without acceleration on March 15, 2009 (the “Maturity Date”), and Lender is the beneficiary under the PAP Guaranty, and is the Secured Party under the PAP Security Agreement, and is the beneficiary under the PECA Guaranty, and is a party to the Joint Instruction Letter, and is a party to the Restructuring Agreement, all of which relate to the Note (collectively, the “Loan Documents”);

WHEREAS, Lender’s affiliate, Lyles Mechanical, is the holder of that certain Promissory Note (Final Payment), dated October 20, 2008, in the principal amount of $1.5 million by the Company in favor of Lyles Mechanical (the “Lyles Mechanical Note”), which will become due and payable without acceleration on March 31, 2009 (the “Lyles Mechanical Maturity Date”);

WHEREAS, the Company has not paid the accrued interest and the $30.0 million principal balance of the Note due on the Maturity Date, and PAP and PECA did not pay such amounts under the Guarantees, all of which nonpayments constitute an Event of Default under the Note and defaults or events of default under the Guarantees and in accordance with the terms of each of the other Loan Documents (the “Existing Defaults”);

WHEREAS, the Company has advised Lyles Mechanical that it will be unable to pay the amount due and payable under the Lyles Mechanical Note on the Lyles Mechanical Maturity Date, which nonpayment will constitute an Event of Default under the Lyles Mechanical Note (the “Anticipated Default”);

WHEREAS, Lender has various rights and remedies after the occurrence of each of the Existing Defaults, which Lender has already agreed to forbear from exercising through March 31, 2009, pursuant to the First Forbearance Agreement;

WHEREAS, the Company intends to obtain unsecured loans of $2 million from William L. Jones (“Jones”) and Neil M. Koehler (“Koehler”), who are principals of one or more of the PE Parties, in consideration of which the Company intends to issue to Jones and Koehler certain unsecured promissory notes (collectively, the “Junior Notes”); and

WHEREAS, the PE Parties have requested that Lender and Lyles Mechanical agree and, subject to the terms and conditions of this Agreement, Lender and Lyles Mechanical have agreed, during (and only during) the Forbearance Period as defined below in this paragraph, with respect to each of the Existing Defaults and the Anticipated Default, to forbear from any demand for immediate payment of any amounts due under the Note, Lyles Mechanical Note or the other Loan Documents as the case may be, and from any exercise of rights to foreclose on any or all of the property of any PE Party in which Lender has been granted a security interest under any of the Loan Documents, or to enforce the Guarantees, until the earliest to occur of (i) April 30, 2009; (ii) the date of termination of the Forbearance Period pursuant to Section 5 hereof; and (iii) the date on which all of the obligations under the Note, the Lyles Mechanical Note and under any of the other Loan Documents have been paid and discharged in full and the Note and Lyles Mechanical Note have been canceled (the “Forbearance Period”):

NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the PE Parties, Lyles Mechanical and Lender hereby agree as follows:

1.       Incorporation of Preliminary Statements .  The preliminary statements set forth above are hereby incorporated into this Agreement as accurate and complete statements of fact.  Without limiting the foregoing, each PE Party hereby acknowledges and agrees that (a) the Note and Lyles Mechanical Note are valid, outstanding and enforceable in accordance with their terms; (b) Lender has, and shall continue to have, valid, enforceable and perfected security interests in and liens upon the property of any PE Party in which Lender has been granted a security interest under any of the Loan Documents; (c) the Guarantees are valid and enforceable in accordance with their terms; (d) absent the effectiveness of this Agreement, Lender has, upon the occurrence of any event of default under any of the Loan Documents, the right to enforce its security interest in, and liens on, the property of any PE Party in which Lender has been granted a security interest under any of the Loan Documents, enforce the obligations of PAP and PECA under the Guarantees, and enforce its other rights and pursue its other remedies under the Loan Documents; (e) absent the effectiveness of the First Forbearance Agreement and this Agreement, the Note was payable in full on the Maturity Date and the Lyles Mechanical Note is payable in full on the Lyles Mechanical Maturity Date, and all obligations under the Note, the Lyles Mechanical Note and the Loan Documents are payable in accordance with the terms thereof, without defense, dispute, offset, withholding, recoupment, counterclaim or deduction of any kind; and (f) after giving effect to this Agreement, the Note and the Lyles Mechanical Note will be payable in full on the earlier to occur of April 30, 2009 and the termination of the Forbearance Period, and all obligations under the Note, the Lyles Mechanical Note and any other Loan Documents shall be payable on such date without defense, dispute, offset, withholding, recoupment, counterclaim or deduction of any kind.

2.        Forbearance .

Provided that no Forbearance Default (as defined below) occurs, and subject in all respects to the terms and conditions of this Agreement including satisfaction of the conditions precedent to the effectiveness of this Agreement set forth in Section 3 below, during the Forbearance Period Lender and Lyles Mechanical agree that they shall not (i) declare the Lyles Mechanical Note to be due and payable or seek to collect all or any portion of the outstanding principal amount of the Note or Lyles Mechanical Note or interest thereon, or any other obligations under the Loan Documents, or (ii) exercise any remedies provided for under the Note, the Lyles Mechanical Note or the other Loan Documents or applicable law on account of the Existing Defaults and the Anticipated Defaults.  Upon termination of the Forbearance Period, Lender and Lyles Mechanical shall have the right to enforce any and all remedies with respect to any default, including any event of default then outstanding under the Note or Lyles Mechanical Note or any of the other Loan Documents (including, without limitation, any Existing Default and the Anticipated Default), as applicable.   Under all events and circumstances, the entire principal balance and all accrued and unpaid interest under the Note and Lyles Mechanical Note and any obligations under any of the other Loan Documents shall be due and payable immediately and in full upon expiration of the Forbearance Period (including without limitation upon termination of the Forbearance Period pursuant to Section 5 below) without any further notice or demand of any kind or nature whatsoever.

3.        Conditions of Effectiveness of this Agreement .   This Agreement shall become effective as of the date hereof (the “Effective Date”) when, and only when:

(a)      Lender and Lyles Mechanical shall have received counterparts of this Agreement duly executed and delivered by the PE Parties, and Lender and Lyles Mechanical shall have executed this Agreement;

(b)      Lender and Lyles Mechanical shall have received a copy of the final form of a forbearance agreement as executed by WestLB, in form and substance satisfactory to Lender and Lyles Mechanical, regarding the WestLB Credit Agreement (the “WestLB Forbearance Agreement”), providing for a forbearance period co-terminous with the Forbearance Period hereunder, and such forbearance shall be in full force and effect;

(c)      Lender and Lyles Mechanical shall have received a copy of a final form of a forbearance agreement executed by Wachovia, in form and substance satisfactory to Lender and Lyles Mechanical, regarding the Wachovia Loan Agreement (the “Wachovia Forbearance Agreement”), providing for a forbearance period co-terminous with the Forbearance Period hereunder, and such forbearance shall be in full force and effect;

(d)      Lender and Lyles Mechanical shall have received evidence satisfactory to them that the Company has received loan proceeds of not less than $2 million nor more than $3 million from the issuance of the Junior Notes, which Junior Notes shall be satisfactory in all respects (including, without limitation, term and ranking) to Lender and Lyles Mechanical; and

(e)      All of the representations and warranties of the PE Parties contained in this Agreement shall be true and correct on and as of the Effective Date (unless stated to relate solely to an earlier date, in which case such representations and warranties shall be true and correct as of such earlier date).

4.        Representations and Warranties .  To induce Lender and Lyles Mechanical to enter into this Agreement, each of the PE Parties represents and warrants to Lender and Lyles Mechanical (which representations and warranties also shall be deemed made on and as of the Effective Date):

(a)      Other than the Existing Defaults and the Anticipated Default, there is no default or event of default presently outstanding under the Loan Documents or Lyles Mechanical Note nor any default or event of default presently outstanding under the First Forbearance Agreement, nor any presently existing condition that will, with the passage of time, constitute a default or event of default under the Loan Documents, the Lyles Mechanical Note or the First Forbearance Agreement during the Forbearance Period;

(b)      Such PE Party has the requisite corporate power and authority and the legal right to execute and deliver this Agreement, and to perform the transactions contemplated hereby.  The execution, delivery and performance by such PE Party of this Agreement, (i) are within the PE Party’s corporate power; (ii) have been duly authorized by all necessary corporate or other action; (iii) do not contravene or cause the PE Party or any other PE Party to be in default under (x) any provision of the PE Party’s or other PE Party’s formation documents or bylaws, (y) any contractual restriction contained in any indenture, loan or credit agreement, lease, mortgage, security agreement, bond, note or other agreement or instrument binding on or affecting the PE Party or other PE Party or its property, or (z) any law, rule, regulation, order, license requirement, writ, judgment, award, injunction, or decree applicable to, binding on or affecting the PE Party or other PE Party or its property; (iv) will not result in the creation or imposition of any lien or encumbrance upon any of the property of the PE Party or other PE Party or any subsidiary thereof other than those in favor of Lender or Lyles Mechanical, all pursuant to the Loan Documents and the Lyles Mechanical Note; and (e) do not require the consent or approval of any governmental authority or any other person or entity, other than those which have been duly obtained, made or complied with and which are in full force and effect.

(c)      This Agreement has been duly executed and delivered by such PE Party.  Each of this Agreement, the Note and the Lyles Mechanical Note (as modified hereby) and the Loan Documents (as modified by the First Forbearance Agreement and by thi