The possibility to utilize fiber sludge, waste fibers from pulp mills and lignocellulose-based biorefineries, for combined production of liquid biofuel and biocatalysts was investigated. Without pretreatment, fiber sludge was hydrolyzed enzymatically to monosaccharides, mainly glucose and xylose. In the first of two sequential fermentation steps, the fiber sludge hydrolysate was fermented to cellulosic ethanol with the yeast Saccharomyces cerevisiae. Although the final ethanol yields were similar, the ethanol productivity after 9.5 h was 3.3 g/l/h for the fiber sludge hydrolysate compared with only 2.2 g/l/h for a reference fermentation with similar sugar content. In the second fermentation step, the spent fiber sludge hydrolysate (the stillage obtained after distillation) was used as growth medium for recombinant Aspergillus niger expressing the xylanase-encoding Trichoderma reesei (Hypocrea jecorina) xyn2 gene. The xylanase activity obtained with the spent fiber sludge hydrolysate (8,500 nkat/ml) was higher than that obtained in a standard medium with similar monosaccharide content (1,400 nkat/ml). Analyses based on deglycosylation with N-glycosidase F suggest that the main part of the recombinant xylanase was unglycosylated and had molecular mass of 20.7 kDa, while a minor part had N-linked glycosylation and molecular mass of 23.6 kDa. Chemical analyses of the growth medium showed that important carbon sources in the spent fiber sludge hydrolysate included xylose, small aliphatic acids, and oligosaccharides. The results show the potential of converting waste fiber sludge to liquid biofuel and enzymes as coproducts in lignocellulose-based biorefineries.