The preparation of biodiesel and nontoxic cottonseed meal from cottonseed by two-step two-phase solvent extraction (TS-TSE) combined with the transesterification reaction was investigated. The TS-TSE process could significantly reduce the biodiesel production costs when compared with the two-phase solvent extraction (TSE) process due to the reduction in methanol. A series of experiments was conducted to evaluate the effects of some factors on the fatty acid methyl ester (FAME) yield and free gossypol (FG) content. These conditions resulted in a maximum FAME yield and reduced the FG content in the cottonseed meal far below the Food and Drug Administration standard. The nontoxic cottonseed meal could be used as animal feed protein source.