The Department of Energy's Office of the Biomass Program has set goals of making ethanol cost competitive by 2012 and replacing 30% of 2004 transportation supply with biofuels by 2030. Both goals require improvements in conversions of cellulosic biomass to sugars as well as improvements in fermentation rates and yields. Current best pretreatment processes are reasonably efficient at making the cellulose/hemicellulose/lignin matrix amenable to enzymatic hydrolysis and fermentation, but they release a number of toxic compounds into the hydrolysate which inhibit the growth and ethanol productivity of fermentation organisms. Conditioning methods designed to reduce the toxicity of hydrolysates are effective, but add to process costs and tend to reduce sugar yields, thus adding significantly to the final cost of production. Reducing the cost of cellulosic ethanol production will likely require enhanced understanding of the source and mode of action of hydrolysate toxic compounds, the means by which some organisms resist the actions of these compounds, and the methodology and mechanisms for conditioning hydrolysate to reduce toxicity. This review will provide an update on the state of knowledge in these areas and can provide insights useful for the crafting of hypotheses for improvements in pretreatment, conditioning, and fermentation organisms.