The Company’s goal is to be a leader in the production of next-generation fuels to meet the increasing demand for renewable, transportation fuels, and to reduce dependence on petroleum-based energy sources in an environmentally responsible manner. We produce and sell biodiesel and crude glycerin through our biodiesel production facility located in Kakinada, India. In October 2008, we commenced start-up of commercial operations and began to produce biodiesel at our plant with a nameplate capacity of 50 million gallons per year (“MGY”). During the remainder of 2008 and in 2009 we focused producing and selling biodiesel as well as further developing sales channels and customers for our biodiesel both in India and for the export market. We produce biodiesel from palm stearin, a non-edible feedstock, which we source from suppliers in India. Our plant was originally established as an export only unit (EOU) to produce biodiesel for sale outside of India, which would have raisedallowed us to save on import duties. However, that original designation did not permit us to buy feedstock and sell biodiesel into the India domestic market. In 2009, we obtained the necessary permits and approvals to sell all of our biodiesel into the Indian domestic market on an ongoing basis and we also obtained in 2009 advanced licenses to allow us to export our biodiesel. With the seasonality of demand for biodiesel, we plan to establish a net amountbase market domestically, and sell into the European market during the summer months when this market is open for our product.

In connection with their year-end audit of our next-generation cellulose ethanol demonstration facilityannual consolidated financial statements, our independent auditors are required to assess whether an emphasis should be included in Butte, Montana.

Wetheir audit report regarding the existence of substantial doubt related to our ability to continue as a going concern. Our auditors have completed constructionissued an opinion on our consolidated financial statements for the fiscal year ended December 31, 2009, which is included with this report on Form 10-K, that states that the factors discussed in Note 1 to the consolidated financial statements raise substantial doubt about our ability to continue as a going concern. As shown in the accompanying consolidated financial statements, the Company incurred a loss of both$11,335,452 in 2009 due to limited sales at our biodiesel plant in India that did not produce enough gross profit to pay for our expenses incurred for research and development, sales, marketing and general and administrative activities. Additionally included in this 2009 net loss was a $2,086,350 expense incurred due to our cellulosicimpairment of land assets held in Illinois and Nebraska. Our cash and cash equivalents balance was $52,178  as of December 31, 2009, of which $9,753 was held in our domestic entities and $42,425 was held in offshore subsidiaries.  We ended 2009 with limited working capital resources, specifically we had negative working capital of 17,936,876 and a net stockholders’ deficit of 3,689,688 at December 31, 2009.  We will need to raise additional working capital in 2010 in order to achieve our goals in India and the U.S.

We also could provide the business with working capital if we are able to increase our biodiesel sales from our India plant to either domestic India customers or export customers in Europe or the U.S. If we are able to complete the repairs and restart of the California ethanol demonstration plant and have been operating bothoperate it at a positive gross profit, this will also provide us with needed working capital to operate our business and pay down our debt. However there can be no assurance that we will be successful in achieving any of them in 2008. We, however, currently do not havethese objectives or, if successfully implemented, that these initiatives will be sufficient cash reserves to meetaddress our anticipated operating and capital obligations.  Aslack of liquidity. If the Company is unable to generate sufficient liquidity from its operations to satisfy its obligations, we could potentially be forced to sell all or a result, we are in the process of seeking additional capital for operationportion of our Kakinada refinery at full capacity, for continuing the glycerin refiningexisting biodiesel facility or other assets to generate cash to continue our business plan. A continued lack of liquidity from biofuel plant operations in 2010 may have a material adverse effect on our liquidity and vegetable oil pretreatment plant construction,may result in our inability to continue as a going concern, and for paying for ongoing corporate overhead expenses.  In addition, once these plants have been constructed, we will have to fund the start-up operations of these plants until the plants generate sufficient cash flow from their operations, if ever. We may encounter unforeseen costs that could also requireor force us to seek additional capital.relief from creditors through a filing under the U.S. Bankruptcy Code.  Our consolidated financial statements do not include any adjustments to the classification or carrying values of our assets or liabilities that might be necessary as a result of the outcome of this uncertainty.

Property, plant and equipment, net, represent more than 90% of the carrying value of our total assets.  We are required to evaluate these long-lived assets for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.   With respect to our biodiesel facility in India, which comprises more than 80% of the carrying value of our total assets, we develop various assumptions to estimate the future cash flows that will be generated from this facility in order to test the recoverability of this asset.  The determination of estimated future cash flows is highly uncertain in the current economic environment.  Further, as our biodeisel facility in India has been in operation for less than 18 months and to date has operated at only about 10% of its daily capacity, we believe that our assumptions regarding future cash flows and in turn the carrying value of our biodiesel facility represent a significant estimate in the preparation of our consolidated financial statements, and, that it is at least reasonably possible that our estimate regarding the recoverability of the carrying value of our long-lived assets including our biodeisel facility will change in the near term.  Included in our estimate, we have been operating at a lossfactored in the increasing demand for biodiesel in Europe and expect to increase our operating expenses significantly as we expand our operations.

The worldwide market for biofuels continued to grow in 2008 and we have benefited from the growth of biodiesel use domestically in India as we beganbased on government regulations requiring the use of renewable fuels by the Government of India and many of the European Union member states.  We have noted the increasing blending obligations in 2010 in some European counties including Bulgaria, France, Germany, Hungary, Poland, Portugal, the Netherlands, Slovakia, Spain, Sweden and the United Kingdom.  We have also made our operationsforecast based on the current prices of fuel and salesfeedstock commodities which currently are forecasted to provide gross production margins; however, our gross margins depend principally on the spread between feedstock and biodiesel prices and this spread has fluctuated significantly in recent periods. The impact to our consolidated financial statements of changes in our estimates of the future cash flows from, and in turn the recoverability of the carrying value of, our biodiesel into the domestic Indian market in November 2008. facility will likely be material to such consolidated financial statements.

Our sales transactions consist of multiple sales of biodiesel to retail distributors of biodiesel in India, one export shipment of biodiesel into Europe and several sales transactions of crude glycerin (the by-product of our biodiesel manufacturing process) to customers in India. We generally receive the order and payment on the sale either before distribution of the product.product or at the time of transfer of title. We sell our product primarily through outside sales brokers and partially through an inside sales force. We have not sold products on a consignment basis or to any international customers. We have the ability to generate additional revenue through the sale of glycerin, the by-product from the biodiesel production process. Glycerin can be sold in crude or refined form. We are in the process

Our gross profit (loss) is derived from our Kakinada plant and expect it to be completed in 2009.  We had no sales less our cost of glycerin in fiscal 2008.goods sold. Our cost of re venues consistsgoods sold is affected primarily by the cost of feedstock, chemicalspalm stearin and plant overhead.palm oil, which are the main feedstocks used to produce biodiesel. On an ongoing basis our cost of goods sold will also be affected by the price of corn and natural gas as they are key inputs into our California ethanol plant. The prices of palm stearin, palm oil, corn and natural gas can vary as a result of a wide variety of factors, including weather, market demand, regulation and general economic conditions, all of which are outside of our control.  Depending upon the costs of these feedstock products in comparison to the sales price of the biodiesel or ethanol, on a going forward basis, our gross margins can vary significantly as a percentage of revenue and can even go from positive to negative. Overhead expenses include direct and indirect costs associated with the biodiesel production at our Kakinada plant, plant utilities, maintenance, insurance, depreciation and freight. Commodity prices were highly volatile in 2008 and, as a result, many biofuels manufacturers were not profitable. Our gross margin was negative in 2008 due to this volatility. Our loss could have been greater if we were running

Additionally direct labor and factory overhead costs are included in the cost of goods sold. Factory overhead expenses include direct and indirect costs associated with the biodiesel production at our factory at higher volumes. We only produced 1,792 metric tonsKakinada plant, plant utilities, maintenance, insurance, depreciation and freight.

Principal areas of biodiesel in 2008 and sold 1,251 metric tons of biodiesel which was 11% of our total daily plant capacity.  Our operating loss in 2008 decreased from the prior year due to the $5,114,000 write off of the Sutton property in 2007. Net of that write off, our operating loss increased in 2008 due to the negative gross margins fro m the sale of our biodiesel. Additionally, our spending infor research and development increased in 2008 as compared toare for the prior years due to the construction and operationoperations of our cellulosic ethanol demonstration plant in Butte. Sales and marketing expenses were incurred in 2008 due to the commencement of our sales of biodiesel. We did not have any sales in 2007 and only had trading activity in 2006, which did not incur material amounts of sales and marketing expenses.

In August 2008, we opened the first integrated cellulose and starch ethanol commercial demonstration facility in Butte. In 2008 certain costs of the United States. Our 9,000 square foot demonstrationconstruction of the plant is capablewere included as well.

Principal areas of producing ethanol fromspending for selling, general and administrative spending are in the areas of employee compensation, professional services, travel, rent, depreciation and office expenses, including certain expenses associated with being a varietypublic company, such as costs associated with our annual audit and quarterly reviews, listing and transfer agent fees.

In 2009, $9,175,349 or 100% of our integrated celluloserevenue was derived from the sale of biodiesel and starch process includes: (i) acquiring existing starch (corn) plantscrude glycerin. We sold approximately $5,910,000 of biodiesel and retrofitting them with our technology; (ii) establishing joint ventures with existing ethanol plants (including corn ethanol plantsapproximately $401,000 of crude glycerin domestically in the U.S.to India and sugarcane ethanol plants in Brazil and India); (iii) constructing and operating standalone cellulosic ethanol facilities; and (iv) licensing our proprietary technology to ethano l plants in the U.S., Brazil and India.

We exited 2008 with an operating plant and ongoing saleswe sold approximately $2,875,000 of biodiesel, in India and with an operating cellulosic ethanol demonstration plantone shipment, to Europe in Butte; however, our current operations are constrained by our limited working capital.  We believe that we can increase sales of biodiesel in 2009; however, the biodiesel market must continue to accept our products and the margins between the feedstock costs and the biodiesel sales price must remain positive in order for us to have positive gross margins inAugust 2009. We expect the market for next generation cellulosic ethanol to continue to grow due to a focus toward reducing reliance on petroleum based fuel and due to increased cellulosic ethanol mandates specified by the RFS. We believe that we can begin generating revenues through the commercialization of our cellulosic ethanol technology in 2009; however, we have not been able to generate revenues from this technology thus far.

Our cash and cash equivalents balance was $377,905 as of December 31,In 2008, of which $36,870 was held in our domestic entities and $341,035 was held in offshore subsidiaries.  Comparatively, our combined cash and cash equivalents and time deposits balance at December 31, 2007 was $3,356,294. Our current ratio as of December 31, 2008 was 0.15 compared to a current ratio of 1.36 as of December 31, 2007. We ended 2008 with limited working capital resources and we will need to raise additional working capital in 2009 in order to achieve our goals in India and the U.S. Due to the recent global financial crisis, obtaining working capital through commercial banks or through other means is a significant

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challenge and we cannot be assured we will be able to obtain additional working capital and therefore be successful in 2009.  Should the Company not be able to raise enough equity or debt financing, it may be forced to sell all or a portion of its existing biodiesel facility or other assets to generate cash to continue the Company’s business plan or possibly discontinue operations.

Results of Operations

Revenues

In 2008,approximately $815,655 or 100% of our revenue was derived from the sale of biodiesel into the Indian domestic market. All revenue in both 2009 and 2008 is considered a part of our India geographic segment. As of December 31, 2008 we have not sold any biodiesel into the international market. No revenues were recorded for the year ended December 31, 2007. For the year ended December 31, 2006 approximately $740,000 or 100% of our revenues were derived from the purchase and resale of biodiesel fuel.

We recognize revenue upon shipment of product as collection is assured because payments are generally made in advance and we do not offer any right of return. We had no$ 32,032 and $0 of accounts receivable as of December 31, 2008.2009 and 2008, respectively. Our average sales transaction consists of a customer taking delivery of several metric tons of biodiesel by loading it into their tanker truck at our plant site. We have several customers who take delivery of biodiesel on a daily basis. As a result, it is difficult to predict timing or size of product sales on a quarterly basis.

Cost As part of Revenues

our one biodiesel export shipment in August 2009, we delivered the 4,125 metric tons of biodiesel to the port of Kakinada, India and payment terms were FOB, Kakinada and payment was secured by a letter of credit deliverable at our bank in India.

We only produced 13,071 metric tons and sold 13,349 metric tons of biodiesel in 2009, which is approximately 8.7% of our 150,000 metric ton per year plant production capacity. We produced, as a by product of biodiesel production 1,597 and sold 1,693 metric tons of glycerin in 2009. In fiscal 2008, due to the commodity markets provedfact that our plant was not commissioned until October 2008, we produced 1,792 metric tons of biodiesel and sold 1,251 metric tons which was 11% of our total plant capacity during the period of operation from November through December 2008. 

Our gross profit for 2009 was $128,683. We were able to be extremely turbulent as evidenced bymaintain a gross profit for the dramatic swings inyear due to the fact that we increased sales to a level where our operating profits were large enough to cover the biodiesel plant’s direct and overhead expenses. Additionally we purchased feedstocks on the spot market when we were able to secure a gross profit based on the corresponding selling price of crude oil andbiodiesel base on customer orders or the current spot market price of feedstocks such as palm oil and corn. Our cost of revenues was impacted by the significant swings in these commodity markets.biodiesel. For the sales we made in November and December of 2008 (after our plant was commissioned in October 2008), we had purchased the feedstock in July 2008, which was near an all time high for palm oil. During the period between July and December, the prices of palm oil ranged from a high of approximately $1,200 per metric ton to a low of $450 per metric ton and the prices for palm based biodiesel ranged from $1,290 to $525 per metric ton. We experienced significant negative gross margins of $1,398,709 for the fiscal yearin 2008 due to the timing of the inventory purchases in July and our subsequent biodiesel sales in November and December. All of our cost of revenues was located in our India geographic segment. No revenues were recorded for t he year ended December 31, 2007. We engaged in the purchase and resale of biodiesel fuel with a cost of revenues of $735,000 during the year ended December 31, 2006.

We summarize our spending into eight components as follows:

		For the Year Ended December 31,
		2008 %			2007 %
Salaries, wages and compensation		47			22
Supplies and services		6			6
Repair and maintenance		—			—
Taxes, insurance, rent and utilities		7			2
Professional services		33			26
Depreciation and amortization		2			—
Travel and entertainment		5			5
Miscellaneous expense		—			39
Total		100			100

The single largest component of selling, general and administrative expense is employee compensation, including related non-cash stock compensation. For the year ended December 31,Our compensation expense was reduced from approximately $4,376,171 in 2008 to approximately $2,224,134 for 2009. The two principal reasons for this reduction was the number of United States employees remained relatively flat at around 12 employees for most ofand the year.non-cash stock compensation. The number of Indiaselling, general and administrative employees in the United States decreased from 13 at the start of 2008 to nine at the end of 2009.  Our sales, general and administrative staff grew from zero at December 31, 2007 to 31 at December 31, 2008.  Compensation expense grewin India from approximately $3,281,900 for4 at the start of 2008 to 12 months ended December 31, 2007at the end of 2009; however, the growth did not have a significant impact on compensation expenses due to approximately $4,089,430 for the 12 months ended December 31, 2008.significantly lower wages in India as compared to the United States.  The increasedecrease was principallyalso driven by the reduction in the non-cash, stock compensation expense of approximately $1,761,857$694,149 during 20082009 as compared to non-cash, stock compensation of $969,888$1,761,857 recorded during 2007.2008.  The increase inhigher stock compensation expenses in 2008 was primarily attributable to an expense of $800,000 related to the accelerated vesting of restricted stock in connection with the termination of one of our of ficers,officers, which is treated for accounting purposes as a new award and revalued at the market value of the stock on the date of termination. For the year ended December 31, 2006, employee compensation expense was $2,025,784, which included stock compensation expenses of $363,460.

The second largest component of selling, general and administrative expense is professional services, which include legal, accounting, financial advisory, board compensation, security filings, and transfer agent fees along with associated non-cash stock compensation expense. For the year ended December 31, 2009, we spent approximately $1,802,837 on professional services including a non-cash stock compensation charge of approximately $23,568 for stock grants to key consultants and advisors. For the year ended December 31, 2008, we spent approximately $3,065,794 on professional services including a non-cash stock compensation charge of approximately $219,667 for stock grants to key consultants and advisors. ForOverall, the year ended December 31, 2007, we spent approximately $3,451,477 on professionalreduction from 2008 was due to a reduced amount of legal and advisory services of which $304,612 was stock-based compensation.  Forretained in 2009 due to our limited cash and working capital available during the year ended December 31, 2006, we spent approximately $2,329,000 on professional services none of which was stock-based compensation.

year.

The third largest component of selling, general and administrative expense is suppliestaxes, insurance, rent and services, which includes project spending on permits, site inspectionsutilities. These expenses remained relatively consistent and land option write-offs. This category also includes miscellaneous expenditures for office supplies, networking services, etc. Of the approximately $527,200 spentwere $739,674 and $787,094 in this category for the 12 months ended December 31,2009 and 2008,  costs relatedrespectively. We did not make any significant changes to developing our Argentina biodiesel project comprised approximately $264,350, costs of expired land options comprised approximately $124,500facilities in 2009 as compared to 2008 that support our selling, general and costs of networking, IT and accounting software comprised approximately $152,260. This compares to the approximately $900,591 spent in this category for the 12 months ended December 31, 2007 and approximately $915,000 for the 12 months ended December 31, 2006. This prior year amount consisted of costs of expired land options totaling approximately $445,124, costs of site inspections totaling approximately $166,487 and cos ts to obtain permits totaling approximately $127,482.  Supplies and services for the year ended December 31, 2006 was approximately $915,000.

administrative functions.

At the end of fiscal 2008 we began selling biodiesel and incurred some selling and marketing expenses, which consisted primarily of salaries, commissions and benefits related to one sales and marketing personnel and sales brokers;person; travel and other out-of-pocket expenses, and the amortization of intangible assets related to our acquisition of Biofuels Marketing, Inc. and facilities costs and other related overhead. Commissions on biodiesel sales are typically accrued and expensed or paid when the respective products are sold. We intend toDuring 2009 we did not hire additional sales personnel nor did we initiate additional marketing programs, so our sales and build additional relationships with resellers and strategic partners on a global basis. Accordingly, wemarketing expenses remained minimal. We expect that our sales and marketing expenses will increase for the foreseeable future in absolute dollars. During 2007,dollars if our biodiesel plant sales dramatically increase and if we begin ethanol production and sales from the sales and marketing organization was developed through the acquisition of Biofuels Marketing, Inc. The Company incurred costs for two empl oyees during fiscal 2007, however we did not record any salesKeyes Plant in 2007 and thus these costs are considered start-up costs and accordingly included in general and administrative.

2010.

We did not enter into any forward purchase commitments in fiscal 2009 because we only purchased feedstock for our India plant at spot market prices. In fiscal 2008 we entered into two forward contracts for crude palm oil. We took delivery of the crude palm oil under the first contract and elected not to take delivery under the second contract by selling our position. Upon selling our position of the second contract, we booked a loss on the forward contract of $532,500 due to the declining price of crude palm. We did not have any gains or losses on forward contracts in fiscal 2007 or 2006.

Other Income (Expense)

Other income (expense) in 2008 consisted of the following items:

·

Pursuant to the terms of its Amended and Restated Registration Rights Agreement, beginning in January 2008 the Company was obligated to file a registration statement to register shares of common stock issued or issuable upon conversion of the Company's Series A and B preferred stock or pay in cash or shares of stock to these investors an amount equal to 0.5% per month of their investment amount. The liquidated damages ceased accruing in December 2008 when the Series B preferred shares became available for trading in compliance with Rule 144. The Company elected to pay these liquidated damages through the issuance of 406,656 shares of common stock to the holders of shares of our Series B preferred stock. The

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liquidated damages penalty resulted in an expense of $1,807,746, classified in other income/expense for the year ended December 31, 2008. The Company issued the 406,656 shares of its common stock to eligible stockholders on or about February 12, 2009.

·

On January 23, 2008, we agreed to end the joint venture with Acalmar Oils and Fats, Ltd. (“Acalmar”) including termination of Acalmar’s right to own or receive any ownership interest in the joint venture. The total cancellation price of $900,000 is reflected in our Statement of Operations as a shareholder agreement cancellation payment.

·

Interest expense is the result of debt facilities acquired by both the Company and its India subsidiary. These debt facilities included warrant coverage and discount fees which are amortized as part of interest expense. We incurred interest expense of $614,426 and capitalized interest of $929,058 into the cost of our biodiesel plant in India. In 2007 we incurred interest expense totaling $73,582 in connection with short term borrowings from a major shareholder and director.

·

Interest income is earned on excess cash. Due to the decrease in our cash balances over the year, as compared to fiscal 2007, our interest income decreased from $171,331 in fiscal 2007 to $50,691 in fiscal 2008.

·

Other income, net of expenses includes $104,810 of income resulting from a purchase and re-sale of glycerin. Additionally we earned other income from renting portions our land holdings in Sutton and Danville to local farmers.

Other income (expense) in 2007 consisted of the following items:

·

In the fourth quarter of 2007, we tested the supply chain for the Kakinada plant through a purchase and resale of feedstocks for approximately $9,352,000, of which approximately $6,128,000 was resold to Acalmar. Sales were made at prevailing market rates. Our net profit on this transaction was $76,000 and is included as other income, net.

·

The Company entered into two agreements with E85, the first one to sell the Wahoo Ethanol LLC and its plant site, and the second one to develop a corn based ethanol plant on the Sutton land in a joint venture with E85. Other income of approximately $9,061,000 consists of the gain of approximately $855,000 from the sale of the Wahoo site and a gain of approximately $8,206,000 from the dissolution of the joint venture with E85.

During 2006, we purchased currency forward contracts to offset the currency risk of converting U.S. dollars into India Rupees, before the use of these funds for the construction of our India plant. We recorded a gain on foreign currency exchange in 2007 in the amount of $544,774. As of December 31, 2008 and 2007, we did not have any currency forward contracts.

Income Taxes

Provision for income taxes is calculated in accordance with Statement of Financial Accounting Standard No. 109, “Accounting for Income Taxes” (“SFAS 109”), using an asset and liability approach. This approach requires the recognition of taxes payable or refundable for the current year and deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns. The measurement of current and deferred taxes is based on provisions of enacted tax law.

SFAS 109 provides for recognition of deferred tax assets if the realization of such assets is more likely than not to occur. Otherwise, a valuation allowance is established for the deferred tax assets which may not be realized.  As of December 31, 2008 and 2007, the Company recorded a full valuation allowance against its net deferred tax assets due to operating losses incurred since inception. Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets were fully offset by a valuation allowance.

The Company is subject to income tax audits by the respective tax authorities in all of the jurisdictions in which it operates. The determination of tax liabilities in each of these jurisdictions requires the interpretation and application of complex and sometimes uncertain tax laws and regulations. The recognition and measurement of current taxes payable or refundable and deferred tax assets and liabilities requires that the Company make certain estimates and judgments. Changes to these estimates or a change in judgment may have a material impact on the Company’s tax provision in a future period.

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Effective January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation on FASB Statement No. 109” (“FIN 48”) which requires a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The Company records a liability for the difference between the benefit recognized and measured pursuant to FIN 48 and the tax position taken or expected to be taken on its tax return. To the extent that the Company’s assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. With the adoption of FIN 48, the Company also began reporting tax-related interest and penalties as a component of income tax expense. The Company’s adoption of FIN 48 did not have a material impact on the Company’s tax position s in these periods.

———————

(a)

See Note 7 – Debt of the Notes to Consolidated Financial Statements. The amounts included in the table above represent principal maturities only.

(b)

See Note 8 – Operating Leases of the Notes to Consolidated Financial Statements.

(c)

Consists of firm purchase commitments under construction contracts and commitments under purchase orders and other short term contracts related to the construction of the glycerin refinery and pre-treatment plant. See Note 13 — Commitments of the Notes to Consolidated Financial Statements.

(d)

Excludes series B preferred stock related to Cordillera for which settlement is unknown. See note 18- Contingent liabilities of the Notes to Consolidated Financial Statements.

Cash and cash equivalents, time deposits and debt at the end of each period were as follows:

		December 31, 2008			December 31, 2007
Cash and cash equivalents and time deposits		$	377,905		$	3,356,294
Short and long term debt		$	10,539,766		$	—

The Company has experienced losses and continued to have negative cash flow through the fiscal year ending December 31, 2008.2009, and, as of December 31, 2009, has negative working capital of $17,936,876 and a net stockholders’ deficit of $3,689,688. Although our operating biodiesel plant has operated at a positive gross margin for the year and can and did provide us cash flow, it will likely be insufficient to allow for the completion of our business plan in 2009.2010. Due to the poor condition of the worldwide credit and equity markets, we were unable to raise additional equity or debt capital to complete the glycerin refinery in India. We are actively pursuing additional working capital through both debt and equity offerings in order to have funds to execute on our business strategy in India and in the United States. Funds available at December 31, 20082009 are sufficient to cover less than one month of our domestic operating costs.

The foregoing matters raise substantial doubt about our ability to continue as a going concern.  In order for us to continue as a going concern, we require a significant amount of additional working capital to fund our ongoing operating expenses and future capital requirements. The use of additional working capital is primarily for the operation of our biodiesel plant in India, the repair and retrofit of our California ethanol plant, for general and administrative expenses, the purchase of feedstock and other raw materials to operate our existing facilities and debt interest and principal payments. Our ability to identify and enter into commercial arrangements with feedstock suppliers in India depends on maintaining our operations agreement with Secunderabad Oil, Limited, who is currently providing us with working capital for our Kakinada facility.  If we are unable to maintain this strategic relationship, our business may be negatively affected.  In addition, the ability of Secunderabad to continue to provide us with working capital depends in part on the financial strength of Secunderabad and its banking relationships.  If Secund erabadSecunderabad is unable or unwilling to continue to provide us with working capital, our business may be negatively affected.

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Our ability to enter into commercial arrangements with feedstock suppliers in California depends on finalizing corn purchase agreement or agreements with corn suppliers who will be providing us with favorable payment terms for our California ethanol plant. If we are unable to negotiate and execute on these corn purchase agreements, our ethanol production business will not begin. In addition to obtaining favorable payment terms from a corn supplier, we will likely negotiate a working capital line of credit with a commercial bank once the ethanol plant becomes operational in 2010 in order to provide us with additional working capital security in addition to or instead of obtaining the favorable vendor payment terms.

With regards to our $5,000,000 senior secured note held by Third Eye Capital (which had a carrying value at December 31, 2008the note was in default for most of $4,504,062), The Company was not in compliance2009 due to non-compliance with the current ratio covenants for October, November andfinancial covenants. Accordingly the default interest rate of 18% was accrued until December nor the stock market capitalization covenant for2009. In December under the loan agreement. On May 6, 2009, the Company entered into an amendment extending the note maturity date until June 30, 2010 and limited waiver (the “Amendment”) with Third Eye Capital Corporation (“Agent”) dated March 31, 2009. The Amendment shall be effective upon and subject to satisfaction of certain conditions.waiving covenant defaults. The Company acknowledgesevaluated the loan modification under ASC 470-50 and agreesASC 470-60 and determined that the failureamendment represented a non-troubled debt modification under ASC 470- 50, in which the original and new debt instrument are not substantially different, accordingly, fees between the debtor and creditor have been reflected as a reduction to perform the conditions will constitute an Event of Default under the Agreement and the Agent shall have the right to demand the immediate repayment in full in cash of all outstanding indebtedness owing to Agent under the Agreement. Once the Amendment becomes effective, the Amendment provides for the extensioncarrying value of the maturity datedebt and will amortized ratably over the seven month term of the $5 Million Promissory Note (the “Note”) issueddebt.  Fees of $350,000 were incurred to Agent pursuantextend the maturity and fees of $300,000 were incurred to that certain Note and Warrant Purchase Agreement dated May 16, 2008, as amended, towaive the financial covenant defaults.  At December 31, 2009, the outstanding balance of principal, interest and fees on the note was $6,670,858.   We plan to pay the note through the cash flows from our biodiesel plant in India and our ethanol plant in California, once it provides for a waiver of certain covenant defaults for a fee.  The Company has also agreed to provide Agent additional collateral as security for the Note and has agreed to amend the exercise price of the warrants issued to a price equal to the volume weighted average trading price of a share of Common Stock of the Company for the twenty trading days immediately preceding the date of this Amendment.

While we expect to obtain waivers for the covenant defaults,becomes operational in the event we are unable to do so, the interest rate under this facility increases by 8% during the periodfirst half of default and, at the option of the lender, the indebtedness may become immediately due and payable. The Company has no cross default provisions in this or any other debt agreement. As a result, our inability to obtain a waiver will have no adverse impact on our other debt obligations. Nevertheless, the failure to obtain a waiver or the acceleration of this debt obligation as a result of this breach may have an adverse impact on our ability to obtain additional borrowings. 2010.

There is no assurance that the Company will be able to obtain alternative funding in the event this debt obligation is accelerated. Immediate acceleration would have a significant adverse impact on the Company’s near term liquidity.

  Our consolidated financial statements do not include any adjustments to the classification or carrying values of our assets or liabilities that might be necessary as a result of the outcome of this uncertainty.

Planned capital expenditures in 20092010 include an expected $1,000,000$500,000 to complete the pre-treatment facility and glycerin refinery at our Kakinada plant.  Commitments for approximately $69,000$60,654 under construction contracts, purchase orders and other short term contracts were outstanding at December 31, 2008.2009. We anticipate that the cash flow from our India operations will fulfill the current commitments and we expect to obtain an additional line of credit in India to provide us with the $1,000,000$500,000 required to complete our  pre-treatment facility and glycerin refinery.

We may continue to deploy our management team’s combined industry, technical, merger and acquisition (“M&A”), restructuring and corporate finance expertise to target and acquire undervalued and/or distressed assets, and then apply our technology to improve the performance of those assets. We believe that our strategy offers substantial opportunity to build capital value in the current climate, particularly given (a) the present opportunity to acquire undervalued and/or underperforming assets and improve them; and (b) the medium to longer term outlook for ethanol and cellulosic ethanol as an alternative form of energy supply and the relatively weak state of the ethanol and cellulose ethanol market which is likely to lead to under supply in 2010. To effect the planned M&A strategy in full, the Company requires access to substantial further acquisition and development finance and it is currently working with advisers with a view to securing additional financing. This may be made available through industry and/or financial partnerships and joint ventures, special purpose financing vehicles, structured acquisition finance arrangements, private placements of equity, debt and blended debt and equity instruments. In addition, the Company anticipates that it may issue share and/or loan capital to vendors as a means of securing target acquisitions and to fund development.

Net cash used in operating activities in fiscal 2008 was $8,680,285 primarily to develop our business, including general and administrative and research and development costs. Net cash used in operating activities increased from $7,087,263 in the prior year primarily as a result of an increase in spending on operations related to interest expense of $614,426 and the addition of inventory of $2,137,500 purchased in connection with the commencement of production at our biodiesel plant in India. The increase in cash used in operating activities would have been even higher if it were not for the increase in accounts payable and accrued liabilities in fiscal 2008, as compared to fiscal 2007. The increase in accounts payable and accrued liabilities offsets the increased use in cash due to the fact that we delayed payments to vendors at the end of the fiscal year December 31, 2008.  

Net cash used in operatingby investing activities in fiscal 20072009 was higher than$49,515, which consisted of purchases of property, plant and equipment relating to the repairs and upgrades to our biodiesel facility in 200 6 due to increased spending for general and administrative expenses, such as professional services and employee compensation.

Investing Activities

India. Net cash used by investing activities in fiscal 2008 was $2,518,913, which consisted primarily of $5,192,124 in purchases of property, plant and equipment relating to the construction of our biodiesel facility in India and our demonstration facility in Montana. Offsetting this amount was the $2,373,326 provided by the sale of time deposits in 2008.

Net cash usedprovided by investingfinancing activities in fiscal 20072009 was $2,220,905, which consisted primarily of the purchasesproceeds from our working capital line of property, plantcredit with Secunderabad Oil and equipment relating toproceeds from our related party revolving line of credit facility, offset by the constructionpayments made in 2009 against this working capital line of our biodiesel plant in Indiacredit and the purchaseprevious related party debt facility. On August 17, 2009, International Biodiesel, Inc., a wholly owned subsidiary of potential plant sitesAE Biofuels, Inc., entered into a Revolving Line of Credit Agreement with Mr. Cagan, (the “Lender”), for $5,000,000.  The $5,000,000 Revolving Line of Credit bears interest at the rate of 10% per annum and matures on July 1, 2011. We used the new Revolving Line of Credit Agreement to satisfy the unsecured revolving line of credit facility with a limit of $3,500,000 in August 2009.  At December 31, 2009, a total of $4,250,031, including accrued interest, was outstanding under the $5,000,000 Revolving Line of Credit, dated August 17, 2009. All outstanding principal and accrued interest is due and payable on July1, 2011.

On May 16, 2008, Third Eye Capital ABL Opportunities Fund (“Purchaser”) purchased a 10% senior secured note in the amount of $5 million along with 5 year warrants exercisable for 250,000 shares of common stock at an exercise price of $3.00 per share. The note is secured by first-lien deeds of trust on real property located in Nebraska and Illinois, offset by $2,775,000 provideda first priority security interest in equipment located in Montana, and a guarantee of $1 million by overpayment refunds, $8,206,446 provided as a result of the dissolution of our joint venture with E85 in August 2007McAfee Capital LLC (owned by Eric McAfee and $2,000,000 provided by the sale of our ethanol plant site in Wahoo, Nebraska.  Net cash used in investing activities in fiscal 2007 was significantly lower than in 2006 due to reduced purchases of property, plant and equipment in 2007 as compared to 2006 and duehis wife). Prior to the cash provided bynote maturing on May 15, 2009, the above mentioned overpaymentCompany entered into an amendment and limited waiver (the “Amendment”) with Third Eye Capital Corporation (“Agent”) on behalf of fundsitself and by the cash provided byPurchaser dated March 31, 2009. The Amendment did not become effective as we were unable to meet the dissolutionconditions of effectiveness set forth in the E85. ThereAmendment. Accordingly, the interest rate under this facility has been accrued at the default interest rate, which is 18%, during the period of default.  On December 10, 2009, the Company entered into an effective amendment extending the note maturity date until June 30, 2010 and waiving financial covenant defaults.  The amended note bears interest at 10%. Fees of $350,000 were we no such transactions occurring in 2006.

Financing Activities

incurred to extend the maturity and fees of $300,000 were incurred to waive the financial covenant defaults.  At December 31, 2009, the outstanding balance of principal, interest and fees on the note were $6,083,716.

Net cash provided by financing activities in fiscal 2008 was $10,906,620, which consisted primarily of the proceeds from short and long term debt, offset by the payments made in 2008 against this debt. As of December 31, 2008, the Company’s long-term debt included $2,044,691 outstanding under a credit facility provided by a related party (a former director and significant shareholder). In 2008 this credit facility was amended to convert the facility into a revolving line of credit with a credit limit of $2,500,000.  The maturity date of the credit facility was extended to January 31, 2011.

On2011.On July 17, 2008, the Company’s subsidiary, Universal Biofuels Pvt. Ltd. entered into a secured term loan in the amount of approximately $6,000,000 of which $4,504,062 was outstanding at December 31, 2008.

At December 31, 2008 the Company had a $5,000,000 senior secured note with Third Eye Capital ABL Opportunities Fund (Third Eye Capital).  The Company was not in compliance with several current ratio covenants or the market capitalization covenant for the months of October, November and December 2008 under the Third Eye Capital loan agreement. We are in the process of obtaining a waiver of these covenant from Third Eye Capital. While we expect to obtain a waiver, in the event we are unable to do so, the interest rate under this facility increases by 8% and, at the option of the lender, the indebtedness may become immediately due and payable. The Company has no cross default provisions in this or any other debt agreement. As a result, our inability to obtain a waiver will have no adverse impact on our other debt obligations. Nevertheless, the failure to obtain a waiver or the acceleration of this debt obligation as a result of this breach may have an a dverse impact on our ability to obtain additional borrowings. There is no assurance that the Company will be able to obtain alternative funding in the event this debt obligation is accelerated. Immediate acceleration would have a significant adverse impact on the Company’s near term liquidity.  Net cash provided by financing activities in fiscal 2007 was significantly lower than in 2006 due to the fact that we sold $21,854,358 of preferred stock, net of offering costs in 2006 as compared to selling $10,056,154 of preferred stock, net of offering costs in 2007.

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of net sales and expenses for each period. The following represents a summary of our critical accounting policies, defined as those policies that we believe are the most important to the portrayal of our financial condition and results of operations and that require management’s most difficult, subjective or complex

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judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.

Our intangible asset was derived from the acquisition of Biofuels Marketing on September 1, 2007. In accordance with SFAS No. 141, “Business Combinations”, we allocated the respective purchase prices to the tangible assets, liabilities and intangible asset acquired based upon their estimated fair values. The principal asset was an intangible asset consisting of a customer list. All of the capitalizable costs of this acquisition were allocated to this customer list as the value of the remaining tangible and intangible assets were negligible. This customer list is being amortized over 18 months, its estimated useful life.

Our long-lived assets are primarily associated with our plant in Kakinada, India. In fiscal 2008, we began operation of our biodiesel plant and we continued the construction of our glycerin refinery and pre-treatment plant. The refinery and pre-treatment plant are expected to be fully operational by the third quarter of 2009. Costs for building them remained in construction-in-progress at December 31, 2008, and will be reclassified once the refinery and pre-treatment plant are fully operational and placed in service.

Additional long-lived assets consist of our two land sites in Illinois and Nebraska. The land and land improvements are held for development of production facilities.

Inventories are stated at the lower of cost, using the first-in and first-out (FIFO) method, or market. In assessing the ultimate realization of inventories, we perform a periodic analysis of market prices and compare that to our weighted-average FIFO cost to ensure that our inventories are properly stated at the lower of cost or market

We make the following estimates and assumptions in determining fair value of stock options as prescribed by SFAS 123(R):

·

Valuation and amortization method — We estimate the fair value of stock options granted using the Black-Scholes-Merton option-pricing formula and a single option award approach. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.

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·

Expected Term — The expected term represents the weighted-average period that our stock-based awards are expected to be outstanding. We applied the “Simplified Method” as defined in the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107.

·

Expected Volatility — The Company’s expected volatilities are based on the historical volatility of comparable public companies’ stock for a period consistent with our expected term.

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Expected Dividend — The Black-Scholes-Merton valuation model calls for a single expected dividend yield as an input. The Company currently pays no dividends and does not expect to pay dividends in the foreseeable future.

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Risk-Free Interest Rate — The Company bases the risk-free interest rate on the implied yield currently available on United States Treasury zero-coupon issues with an equivalent remaining term.

ASC 718:

Given the absence of an active market for our common stock as a private company before the Reverse Merger, our board of directors, the members of which we believe had extensive business, finance or venture capital experience, were required to estimate the fair value of our common stock for purposes of determining exercise prices for the options it granted. Our board of directors determined the estimated fair value of our common stock, based in part on an analysis of relevant metrics, including the following:

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the prices for our convertible preferred stock sold to outside investors in arm’s-length transactions;

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the rights, preferences and privileges of that convertible preferred stock relative to those of our common stock;

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our operating and financial performance;

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the hiring of key personnel;

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the introduction of new products;

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our stage of development and revenue growth;

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the fact that the option grants involved illiquid securities in a private company;

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the risks inherent in the development and expansion of our operations; and

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the likelihood of achieving a liquidity event, such as an initial public offering or a sale of us, for the shares of common stock underlying the options given prevailing market conditions.