**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**





**FORM
      10-Q**





x QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


for
      the
      quarterly period ended March 31, 2008





 ̈ TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


for
      the
      transition period from ______to _________.





Commission
      file number: 00-51354





**AE
      BIOFUELS, INC.**


(Exact
      name of registrant as specified in its charter)





Nevada
            84-0925128(State
                or other jurisdiction of
              incorporation
                or organization)
            (IRS
                Employer identification No.)





20400
      Stevens Creek Blvd., Suite 700


Cupertino,
      CA 95014


(Address
      of principal executive offices)





(408)
      213-0940


(Registrant's
      telephone number)





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities


Exchange
      Act of 1934 during the preceding 12 months (or for such shorter period that
      the
      registrant was required to file such reports), and (2) has been subject to
      such
      filing requirements for the past 90 days. Yes x No  ̈





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting company.
      See
      the definitions of "large accelerated filer," "accelerated filer" and "smaller
      reporting company" in Rule 12b-2 of the Exchange Act. (Check one):




Large accelerated filer
             ̈
            
            Accelerated filer ̈Non-accelerated filer
             ̈
            
            Smaller reporting company  x





Indicate by check mark whether the registrant is a
      shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ̈ No
x


The
      number of shares outstanding of the Registrant’s Common Stock on May 12, 2008
      was 84,885,920.





**AE
      BIOFUELS, INC.**


**FORM
      10-Q**


Quarterly
      Period Ended March 31, 2008





Page**INDEX**SPECIAL
                NOTE REGARDING FORWARD-LOOKING STATEMENTS
            
            3PART
                I. FINANCIAL INFORMATIONItem
                1.
            Financial
                StatementsConsolidated
                Balance Sheets as of March 31, 2008 and December 31, 2007
            
            4Consolidated
                Statements of Operations for Three Months ended March 31, 2008 and
                2007
            
            5Consolidated
                Statements of Cash Flows for the Three Months ended March 31, 2008
                and
                2007
            
            6Notes
                to the Consolidated Financial Statements
            
            7Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            19Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk.
            
            24Item
                4T.
            Controls
                and Procedures
            
            24PART
                II. OTHER INFORMATIONItem
                1.
            Legal
                Proceedings
            
            25Item
                1A.
            Risk
                Factors
            
            25Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            25Item
                3.
            Defaults
                Upon Senior Securities
            
            25Item
                4.
            Submission
                of Matters to a Vote of Security Holders.
            
            25Item
                5.
            Other
                Information
            
            25Item
                6.
            Exhibits
            
            25SIGNATURES
            
            
            26


2


**SPECIAL
      NOTE REGARDING FORWARD—LOOKING STATEMENTS**




On
      one or
      more occasions, we may make forward-looking statements in this Quarterly Report
      on Form 10-Q regarding our assumptions, projections, expectations, targets,
      intentions or beliefs about future events. Words or phrases such as
“anticipates,” “may,” “will,” “should,” “believes,” “estimates,” “expects,”
“intends,” “plans,” “predicts,” “projects,” “targets,” “will likely result,”
“will continue” or similar expressions identify forward-looking statements.
      Readers are cautioned that these forward-looking statements are only predictions
      and are subject to risks, uncertainties, and assumptions that are difficult
      to
      predict, including those identified below, under “ *Part
      II — Other Information, Item 1A. Risk Factors* ”
and
      elsewhere herein. Therefore, actual results may differ materially and adversely
      from those expressed in any forward-looking statements. We undertake no
      obligation to publicly update or revise any forward-looking statements, whether
      as a result of new information, future events or otherwise. However, your
      attention is directed to any further disclosures made on related subjects in
      our
      subsequent annual and periodic reports filed with the Securities and Exchange
      Commission on Forms 10-K, 10-Q and 8-K and Proxy Statements on Schedule
      14A.




Unless
      the context requires otherwise, references to “we,” “us,” “our,” the “Company”
and “the Company” refer specifically to AE Biofuels, Inc. and our
      subsidiaries.


3


**PART
      I - FINANCIAL INFORMATION**





**Item
      1 - Financial Statements**





**AE
      BIOFUELS, INC.**


**(A
      Development Stage Company)**


**CONSOLIDATED
      BALANCE SHEETS**




As of
              March 31,
              2008
            
            As of
              December 31,
              2007**Assets**
            
            
            (Unaudited)Current
                assets:Cash
                and cash equivalents
            
            $
            555,754
            
            $
            720,402Marketable
                securities
            
            
            888,760
            
            
            2,635,892Accounts
                receivable
            
            
            205,270
            
            
            3,447,039Accounts
                receivable - related party
            
            
            -
            
            
            6,127,727Prepaid
                expenses
            
            
            41,019
            
            
            58,872Other
                current assets
            
            
            687,865
            
            
            674,235Total
                current assets
            
            
            2,378,668
            
            
            13,664,167Property,
                plant and equipment, net
            
            
            21,974,076
            
            
            19,585,087Intangible
                assets
            
            
            183,334
            
            
            233,334Other
                assets
            
            
            74,447
            
            
            68,488**Total
                assets**
            
            **$**
            **24,610,525**
            
            **$**
            **33,551,076****Liabilities
                and Stockholders' Equity**Current
                liabilities:Accounts
                payable and accrued liabilities
            
            $
            4,446,157
            
            $
            9,985,639Income
                taxes payable
            
            
            47,347
            
            
            36,750Short
                term borrowings (related party)
            
            
            1,712,508
            
            
            -Total
                current liabilities
            
            
            6,206,012
            
            
            10,022,389Commitments
                and contingencies (Notes 6, 7, 8, 13 and 16)Stockholders'
                equity:Series
                B Preferred Stock, $0.001 par value - 40,000,000  authorized; 6,270,491
                and 6,487,491 shares issued and  outstanding, respectively (aggregate
                liquidation preference of $18,811,473 and
                19,462,473)
            
            
            6,270
            
            
            6,487Common
                Stock - , $0.001 par value 400,000,000 authorized  84,785,920
                and 84,557,462
                shares issued and outstanding,  respectively
            
            
            84,785
            
            
            84,557Additional
                paid-in capital
            
            
            34,072,405
            
            
            33,707,953Deficit
                accumulated during the development stage
            
            
            (17,228,210
            )
            
            (11,995,395
            )Accumulated
                other comprehensive income
            
            
            1,469,263
            
            
            1,725,085Total
                stockholders' equity
            
            
            18,404,513
            
            
            23,528,687**Total
                liabilities and stockholders' equity**
            
            **$**
            **24,610,525**
            
            **$**
            **33,551,076**





*The
      accompanying notes are an integral part of the financial
      statements*


4




**AE
      BIOFUELS, INC.**


**(A
      Development Stage Company)**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


(Unaudited)





Three Months EndedMarch 31, 2008
            
            March 31, 2007
            
            From November 29,
              2005 (Inception)
              through March 31,
              2008Sales
            
            $
            -
            
            $
            -
            
            $
            744,450Cost
                of goods sold
            
            
            -
            
            
            -
            
            
            735,000Gross
                profit
            
            
            -
            
            
            -
            
            
            9,450Research
                and development
            
            
            124,348
            
            
            -
            
            
            382,109General
                and administrative expenses
            
            
            1,962,005
            
            
            1,440,446
            
            
            22,776,471Operating
                loss
            
            
            (2,086,353
            )
            
            (1,440,446
            )
            
            (23,149,130
            )Other
                income / (expense)Interest
                income net of expense
            
            
            13,541
            
            
            (38,137
            )
            
            111,290Other
                income net of expenses
            
            
            35,961
            
            
            -
            
            
            224,277Gain
                from sale of subsidiaries and dissolution of joint venture
            
            
            -
            
            
            854,695
            
            
            9,061,141Gain
                (loss) on foreign currency exchange
            
            
            -
            
            
            -
            
            
            497,954Shareholder
                agreement cancellation payment
            
            
            (900,000
            )
            
            -
            
            
            (900,000
            )Registration
                rights payment
            
            
            (2,274,402
            )
            
            -
            
            
            (2,274,402
            )Income
                related to 50/50 joint venture
            
            
            
            
            
            
            
            
            182,923Loss
                before income taxes
            
            
            (5,211,253
            )
            
            (623,888
            )
            
            (16,245,947
            )Income
                taxes
            
            
            (21,561
            )
            
            -
            
            
            (100,145
            )Net
                loss
            
            $
            (5,232,814
            )
            $
            (623,888
            )
            $
            (16,346,092
            )Loss
                per common shareBasic
                and diluted
            
            
            (0.06
            )
            
            (0.01
            )
            
            (0.22
            )Weighted
                average shares outstandingBasic
                and diluted
            
            
            84,565,639
            
            
            74,868,020
            
            
            75,063,415




*The
      accompanying notes are an integral part of the financial
      statements*


5


**AE
      BIOFUELS, INC.**


**(A
      Development Stage Company)**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(Unaudited)**





Three Months Ended
            
            From November
              29, 2005
              (Inception)
              through MarchMarch 31, 2008
            
            March 31, 2007
            
            31, 2008**Operating
                activities:**Net
                loss
            
            $
            (5,232,814
            )
            $
            (623,887
            )
            $
            (16,346,092
            )Adjustments
                to reconcile net loss toNet
                cash provided by (used in) operating activities:Stock
                based compensation
            
            
            364,463
            
            
            45,409
            
            
            2,002,423Expired
                land options
            
            
            
            
            
            
            
            
            445,124Amortization
                and depreciation
            
            
            53,131
            
            
            -
            
            
            122,906Registration
                rights payment
            
            
            2,274,402
            
            
            -
            
            
            2,274,402Gain
                on sale of subsidiary
            
            
            -
            
            
            (854,695
            )
            
            (854,695
            )Loss
                on impairment of assets
            
            
            -
            
            
            -
            
            
            5,114,236Gain
                on dissolution of joint venture
            
            
            -
            
            
            -
            
            
            (8,206,446
            )Gains
                on forward currency contracts
            
            
            -
            
            
            -
            
            
            (436,154
            )Changes
                in assets and liabilities:Accounts
                receivable
            
            
            9,285,211
            
            
            (395,700
            )
            
            351,936Prepaid
                expenses
            
            
            3,647
            
            
            43,501
            
            
            (57,150
            )Other
                assets
            
            
            (5,999
            )
            
            (2,167,297
            )
            
            410,768Accounts
                payable
            
            
            (8,719,500
            )
            
            (422,680
            )
            
            655,432Other
                liabilities
            
            
            999,673
            
            
            1,250
            
            
            944,428Income
                taxes payable
            
            
            11,048
            
            
            -
            
            
            46,011**Net
                cash used in operating activities**
            
            
            (966,738
            )
            
            (4,374,099
            )
            
            (13,532,871
            )**Investing
                activities:**
            
            
            
            
            
            
            
            
            -Purchases
                of property, plant and equipment
            
            
            (2,627,350
            )
            
            (3,525,592
            )
            
            (29,468,453
            )Purchases
                of marketable securities
            
            
            -
            
            
            -
            
            
            (2,459,292
            )Sales
                of marketable securities
            
            
            1,718,116
            
            
            -
            
            
            1,718,116Cash
                restricted by letter of credit
            
            
            -
            
            
            -
            
            
            (500,000
            )Purchase
                of Marwich II, Ltd., net of losses
            
            
            -
            
            
            -
            
            
            (662,406
            )Exchange
                rate gain
            
            
            -
            
            
            (46,820
            )
            
            (193,399
            )Additions
                to other assets and intangibles
            
            
            -
            
            
            -
            
            
            (1,073,872
            )Refund
                of property expenditures
            
            
            -
            
            
            -
            
            
            2,775,000Return
                of assets from disolution of joint venture
            
            
            -
            
            
            -
            
            
            8,206,446Sale
                of Wahoo facility
            
            
            -
            
            
            2,000,000
            
            
            2,000,000**Net
                cash used in investing acivities**
            
            
            (909,234
            )
            
            (1,572,412
            )
            
            (19,657,860
            )**Financing
                activities:**Proceeds
                from (payments of) short term borrowings
            
            
            1,712,508
            
            
            (750,000
            )
            
            1,712,508Proceeds
                from long-term debt
            
            
            -
            
            
            -
            
            
            250,000Payments
                on long-term debt
            
            
            -
            
            
            (241,071
            )
            
            (250,000
            )Proceeds
                from settlement
            
            
            -
            
            
            -
            
            
            200,000Refund
                of investment
            
            
            -
            
            
            -
            
            
            (90,000
            )Proceeds
                from sale of preferred stock, net of offering costs
            
            
            -
            
            
            7,860,630
            
            
            31,910,512**Net
                cash provided by financing activities**
            
            
            1,712,508
            
            
            6,869,559
            
            
            33,733,020Effect
                of exchange rate fluctuations on cash and cash equivalents
            
            
            (1,184
            )
            
            -
            
            
            13,465**Net
                increase (decrease) in cash and cash equivalents for
                period**
            
            
            (164,648
            )
            
            923,048
            
            
            555,754**Cash
                and cash equivalents, beginning of period**
            
            
            720,402
            
            
            1,213,134
            
            
            -**Cash
                and cash equivalents, end of period**
            
            $
            555,754
            
            $
            2,136,182
            
            $
            555,754




*The
      accompanying notes are an integral part of the financial
      statements*


6


**AE
      BIOFUELS, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(Unaudited)




**1.**  **Nature
      of Activities and Summary of Significant Accounting
      Policies.**




*Nature
      of Activities* .
      These
      consolidated financial statements include the accounts of AE Biofuels, Inc.,
      a
      Nevada corporation, and its wholly owned subsidiaries, American Ethanol, Inc.
      (“American”), a Nevada corporation; Sutton Ethanol, LLC (“Sutton”), a Nebraska
      limited liability company; Illinois Valley Ethanol, LLC (“Illinois Valley”), an
      Illinois limited liability company; Biofuels Marketing, Inc., a Delaware
      corporation; International Biodiesel, Inc., a Nevada corporation and its
      subsidiaries International Biofuels, Ltd, a Mauritius corporation and its
      subsidiary Universal Biofuels Private Ltd, an India company; Danville Ethanol,
      Inc., an Illinois corporation; and Energy Enzymes Inc., a Delaware corporation,
      collectively, (“AE Biofuels” or “the Company”).




The
      Company’s purpose is to develop, acquire, construct, operate and sell fuel grade
      ethanol and biodiesel from ethanol and biodiesel production facilities primarily
      located in the United States and India. The Company is a development stage
      company and as such, does not expect to generate any meaningful revenue until
      its plants are completely constructed and operational, or operational plants
      have been acquired. Since inception, the Company has engaged in (i) fund raising
      through the sale of stock, (ii) purchased or acquired options to purchase land
      for development of ethanol plants in the United States, (iii) completed
      construction of a biodiesel manufacturing facility in Kakinada, India through
      a
      joint venture among International Biodiesel, Inc., its wholly owned subsidiary,
      Universal Biofuels Private, Ltd., a Mauritius corporation, and Acalmar, an
      India
      corporation (iv) started ground work for an ethanol facility in Sutton,
      Nebraska, and (v) began the construction of a glycerin refining operation at
      the
      Kakinada plant.




AE
      Biofuels was originally formed in California on September 12, 2001 as Great
      Valley Ventures LLC, however, no operating agreement was adopted and no capital
      was contributed until November 29, 2005. Between September 2001 and November
      2005 the Company had no operations and engaged in no activities. From November
      2005 through December 2005, the Company commenced development activities with
      the addition of key advisors, management, and additional founding shareholders.
      On January 12, 2006, the company was renamed American Ethanol, LLC. On February
      23, 2006, American Ethanol, LLC merged into American Ethanol, Inc., a Nevada
      corporation.




On
      June
      23, 2006, American Ethanol acquired 88.3% of the outstanding common stock of
      Marwich II, Ltd. (“Marwich”). Marwich was a shell company with no operations. On
      December 7, 2007, American Ethanol merged with and into Marwich and (i) each
      issued and outstanding share of American Ethanol common stock (including common
      stock issued upon conversion of American Ethanol Series A Preferred Stock,
      which
      automatically converted into two common stock shares for each share of Series
      A
      Preferred Stock immediately prior to the closing of the Merger) and Series
      B
      Preferred Stock (also convertible into common stock at the holders discretion)
      converted into Series B Preferred Stock, respectively, of Marwich, and (ii)
      each
      issued and outstanding warrant and/or option exercisable for common stock of
      American Ethanol was assumed and converted into a warrant and/or option
      exercisable for common stock of Marwich. Marwich then changed its name to AE
      Biofuels, Inc.




*Basis
      of Presentation and Consolidation* .
      The
      consolidated financial statements include the accounts of the Company and its
      wholly-owned subsidiaries. All intercompany balances and transactions have
      been
      eliminated. The accompanying consolidated balance sheets as of March 31, 2008,
      the consolidated statements of operations for the three months ended March
      31,
      2008 and 2007, and the consolidated statements of cash flows for the three
      months ended March 31, 2008 and 2007 are unaudited. The consolidated balance
      sheet data as of December 31, 2007 was derived from the 2007 audited
      consolidated financial statements and notes thereto. The condensed consolidated
      financial statements in this report should be read in conjunction with the
      2007
      audited consolidated financial statements and notes thereto included in the
      Company’s annual report on Form 10-K for the year ended December 31, 2007.




The
      accompanying unaudited interim condensed consolidated financial statements
      as of
      March 31, 2008 and for the three months ended March 31, 2008 and 2007 have
      been
      prepared in accordance with accounting principles generally accepted in the
      United States (GAAP) pursuant to the rules and regulations of the Securities
      and
      Exchange Commission. Certain information and footnote disclosures normally
      included in financial statements prepared in accordance with accounting
      principles generally accepted in the United States have been condensed or
      omitted pursuant to such rules and regulations.




In
      the
      opinion of management, the unaudited interim condensed consolidated financial
      statements as of December 31, 2007 and for the three months ended March 31,
      2008
      and 2007 have been prepared on the same basis as the audited consolidated
      statements and reflect all adjustments, which are normal recurring adjustments,
      necessary for the fair presentation of its statement of financial position,
      results of operations and cash flows. The results of operations for the three
      months ended March 31, 2008 are not necessarily indicative of the operating
      results for any subsequent quarter, for the full fiscal year or any future
      periods.


7


*Use
      of Estimates* .
      The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires management to make estimates
      and assumptions that affect the reported amounts of assets and liabilities
      and
      disclosure of contingent assets and liabilities at the date of the financial
      statements as well as the reported amounts of expenses during the reporting
      period. Significant estimates, assumptions and judgments made by management
      include the determination of impairment of long-lived assets, the valuation
      of
      equity instruments such as options and warrants, and the accrual for the
      payments under the Company's registration rights agreement with certain of
      its
      shareholders and managements judgement about contingent liabilities. Management
      believes that the estimates and judgments upon which they rely are reasonable
      based upon information available to them at the time that these estimates and
      judgments are made. To the extent there are material differences between these
      estimates and actual results, the Company’s consolidated financial statements
      will be affected.




*Fair
      Value of Financial Instruments.* The carrying amounts of cash equivalents, marketable securities, land options,
      accounts receivable and accounts payable approximate their respective fair
      values due to their short-term maturities. Our fair value instruments that
      require remeasurement are valued by the institution that holds the
      instruments. Due to the nature of these instruments, which are essentially
      time
      deposits, there is little risk of variances between the reported basis by the
      holding institution and the fair value.




*Reclassifications.* ****** Certain
      prior year amounts were reclassified to conform to current year presentation.
      These reclassifications had no impact on previously reported net loss or deficit
      accumulated during the development stage.




*Revenue
      recognition* .
      The
      Company recognizes revenue when products are shipped and services are rendered,
      the price is fixed or determinable and collection is reasonably
      assured.




*Cash
      and Cash Equivalents* .
      The
      Company considers all highly liquid investments with an original maturity of
      three months or less to be cash equivalents.




*Marketable
      Securities.* The
      Company’s short-term investments consist primarily of short term time deposits
      in India banks, which represented funds available for plant completion and
      current operations. In accordance with Statement of Financial Accounting
      Standards (“SFAS”) No. 115, *Accounting
      for Certain Investments in Debt and Equity Securities* ,
      these
      short-term investments are classified as available-for-sale and are carried
      at
      fair market value. These securities had stated maturities beyond three months
      but were priced and traded as short-term instruments. Available-for-sale
      securities are marked-to-market based on quoted market values of the securities,
      with the unrealized gains and losses, net of tax, reported as a component of
      accumulated other comprehensive income (loss). Realized gains and losses on
      sales of available-for-sale securities are computed based upon the initial
      cost
      adjusted for any other-than-temporary declines in fair value. The cost of
      investments sold is determined on the specific identification
      method.




*Property,
      Plant and Equipment* .
      Property, plant and equipment are carried at cost less accumulated depreciation
      after assets are placed in service and are comprised primarily of land acquired
      for development of production facilities, and the biodiesel plant in India.
      The
      estimated useful life of this plant is expected to be 20 years, once placed
      in
      service. Estimated useful lives for office equipment and computers is 3 years
      and the useful life of machinery and equipment is 7 years. Depreciation is
      provided using the straight line method over the useful life of the
      assets.




*Intangible
      Assets.* Intangible assets are carried at initial fair value less accumulated
      amortization over the estimated useful life. Amortization is computed over
      the
      estimated useful lives of the underlying assets using a method that
      reflects their utilization pattern.




*Stock
      Splits* .
      On
      February 28, 2006 and on May 18, 2006, the Company’s board of directors declared
      a two-for-one stock split. All share amounts have been retroactively adjusted
      to
      reflect the stock splits.




*Research
      and Development.* Research
      and development costs are expensed as incurred.




*Income
      Taxes.*  ****** The
      Company recognizes income taxes 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, 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.


8


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 position
      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.




*Long -
      Lived Assets.* The
      Company evaluates the recoverability of long-lived assets with finite lives
      in
      accordance with Statement of Financial Accounting Standards No. 144, *"Accounting
      for the Impairment or Disposal of*  *Long-*  *Lived
      Assets"* (“SFAS
      144”), which requires recognition of impairment of long-lived assets whenever
      events or changes in circumstances indicate that the carrying amount of an
      asset
      may not be recoverable. When events or changes in circumstances indicate that
      the carrying amount of an asset may not be recoverable based on estimated
      undiscounted cash flows, the impairment loss would be measured as the difference
      between the carrying amount of the assets and its fair value based on the
      present value of estimated future cash flows.




*Net
      Loss Per Share.*  ****** Basic
      loss per share is computed by dividing loss attributable to common shareholders
      by the weighted average number of common shares outstanding for the period,
      net
      of shares subject to repurchase. Diluted loss per share reflects the dilution
      of
      common stock equivalents such as options, convertible preferred stock and
      warrants, to the extent the impact is dilutive. As the Company incurred net
      losses for the three month periods ended March 31, 2008 and 2007 and on a
      cumulative basis, potentially dilutive securities have been excluded from the
      diluted net loss per share computations as their effect would be anti-dilutive.
      The weighted-average number of potentially dilutive shares excluded from the
      diluted net loss per share calculation for March 31, 2008 and 2007 and on a
      cumulative basis was 11,454,809, 14,874,820 and 8,519,004,
      respectively.




*Comprehensive
      Income.* Statement of Financial Accounting Standards No. 130, " *Reporting
      Comprehensive Income"* ("SFAS
      130"), requires that an enterprise report, by major components and as a single
      total, the change in its net assets from non-owner sources. The Company’s other
      comprehensive income consists primarily of foreign currency translation
      adjustments.




*Foreign
      Currency Translation/Transactions.*  ****** Assets
      and liabilities of non-U.S. subsidiaries that operate in a local currency
      environment, where that local currency is the functional currency, are
      translated into U.S. dollars at exchange rates in effect at the balance
      sheet date; with the resulting translation adjustments directly recorded to
      a
      separate component of accumulated other comprehensive income. Income and expense
      accounts are translated at average exchange rates during the year. Gains and
      losses from foreign currency transactions are recorded in other income (loss),
      net. The functional currency is the local currency for all
      non-U.S. subsidiaries.




*Restricted
      Stock.* The
      Company has granted restricted stock awards, restricted by a service condition,
      with vesting periods of up to 3 years. Restricted stock awards are valued using
      the fair market value of the Company’s common stock as of the date grant. The
      Company recognizes compensation expense on a straight line basis over the
      requisite service period of the award. The remaining unvested shares are subject
      to forfeitures and restrictions on sale, or transfer, up until the vesting
      date.




*Stock-Based
      Compensation Expense.* Effective January 1, 2006, we adopted the fair value recognition provisions
      of SFAS No. 123 (Revised 2004), “ *Share-Based
      Payment* ”
(“SFAS
      123(R)”), requiring us to recognize expense related to the fair value of our
      stock-based compensation awards adjusted to reflect only those shares that
      are
      expected to vest. Our implementation of SFAS 123(R) used the
      modified-prospective-transition method where the compensation cost related
      to
      each unvested option as of January 1, 2006, was recalculated and any
      necessary adjustment was recorded in the first quarter of adoption.




We
      made
      the following estimates and assumptions in determining fair value:




·
            *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.




·
            *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 and
                110.




·
            *Expected
                Volatility*—
                The Company’s expected volatilities are based on historical volatility of
                comparable public companies.




9


·
            *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.




·
            *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.




*Recent
      Accounting Pronouncements*




In
      September 2006, the FASB issued Statement No. 157, “ *Fair
      Value Measurements* ”
      (“SFAS 157”). SFAS 157 defines fair value, establishes a framework and
      gives guidance regarding the methods used in measuring fair value, and expands
      disclosures about fair value measurements. SFAS 157 is applicable whenever
      another accounting pronouncement requires or permits assets and liabilities
      to
      be measured at fair value. SFAS 157 does not expand or require any new fair
      value measures, however the application of this statement may change current
      practice. On January 1, 2008, the Company adopted SFAS 157 and the adoption
      of
      this statement had no material effect on the Company’s financial
      statements




In
      February 2007, the FASB issued SFAS No. 159, “ *The
      Fair Value Option for Financial Assets and Financial Liabilities-Including
      an
      Amendment of FASB Statement No. 115* ”
("SFAS
      159") . This statement permits entities to choose to measure many financial
      instruments and certain other items at fair value. The fair value option may
      be
      elected on an instrument-by-instrument basis, with few exceptions. SFAS 159
      also
      establishes presentation and disclosure requirement to facilitate comparisons
      between companies that choose different measurement attributes for similar
      assets and liabilities . On
      January 1, 2008, the Company adopted SFAS 159 and the adoption of this statement
      had no material effect on the Company’s financial statements.




In
      December 2007, the FASB issued SFAS No. 141(R), “ *Business
      Combinations* ”
(“SFAS
      141R”). This statement changes the accounting for acquisition transaction costs
      by requiring them to be expensed in the period incurred, and also changes the
      accounting for contingent consideration, acquired contingencies and
      restructuring costs related to an acquisition. Also in December 2007, the FASB
      issued SFAS No. 160, “ *Noncontrolling
      Interests in Consolidated Financial Statements-an amendment of ARB No.
      51* ”
(“SFAS
      160”). This statement will change the accounting and reporting for minority
      interests, which will be recharacterized as noncontrolling interests, classified
      as a component of equity and accounted for at fair value. SFAS 141(R) and SFAS
      160 are effective for the Company’s 2009 financial statements. Early adoption is
      prohibited. The effect the adoption of SFAS 141(R) and SFAS 160 will
      have on the Company’s financial statements will depend on the nature and size of
      acquisitions we complete after we adopt SFAS 141(R) and SFAS 160.




**2.**  **Ability
      to Continue as a Going Concern.**




The
      accompanying financial statements have been prepared on a going concern
      basis, which contemplates the realization of assets and satisfaction of
      liabilities in the normal course of business. The Company has experienced losses
      and negative cash flow since inception and currently has an accumulated deficit.
      These factors raise substantial doubt about its ability to continue as a going
      concern. The Company’s ability to continue as a going concern is dependent on
      several factors.




The
      Company has had minimal revenues and has incurred losses due to start up costs
      from inception through March 31, 2008. The Company has raised approximately
      $31.8 million dollars to date through the sale of preferred stock. An additional
      $2 million of cash has been generated through the sale of its subsidiary, Wahoo
      Ethanol, LLC, with an additional $8 million through the dissolution of the
      Sutton Ethanol joint venture. The Company will have to raise significantly
      more
      capital and secure a significant amount of debt to complete its business plan
      and continue as a going concern. In addition, the recent increase in feedstock
      prices has significantly decreased the margin available to ethanol and biodiesel
      producers on each gallon produced. The Company has no ethanol or biodiesel
      plants in operation as of March 31, 2008. Management plans to begin operations
      of its biodiesel facility in India and begin importing biodiesel for sale in
      the
      U.S. during 2008. Although the biodiesel plant will provide some cash flow,
      it
      will be insufficient to allow development of additional ethanol
      facilities.




Management
      believes that it will be able to raise additional capital through equity
      offerings and debt financings. Should the Company not be able to raise
      sufficient capital through equity or debt financings, it may be forced to sell
      proposed plant sites to other ethanol producers to generate cash to continue
      the
      Company’s business plan. The Company’s goal is to raise additional funds needed
      to construct and operate ethanol and biodiesel facilities through stock
      offerings and debt financings.


10




**3.**  **Property,
      Plant and Equipment.**




Property,
      plant and equipment consist of the following:




**March
                31,**
              **2008**
            
            **December
                31,**
              **2007**Land
            
            $
            3,798,518
            
            $
            3,734,623Furniture
                and fixtures
            
            
            52,747
            
            
            52,747Construction
                in progress
            
            
            18,128,882
            
            
            15,800,752Total
                gross property, plant and equipment
            
            
            21,980,147
            
            
            19,588,122Less
                accumulated depreciation
            
            
            (6,071
            )
            
            (3,035
            )Total
                net property, plant and equipment
            
            $
            21,974,076
            
            $
            19,585,087




**4.**  **Other
      Assets.**




Other
      assets consists of payments for land options for possible future ethanol plants,
      Web domain names purchased by the Company, purchased customer lists, prepaid
      expenses, deposits and contract lease prepayments.




**March
                31,**
              **2008**
            
            **December
                31,**
              **2007**CurrentLetter
                of credit securing material purchases
            
            $
            500,000
            
            $
            500,000Land
                options
            
            
            164,536
            
            
            164,536Other
            
            
            23,329
            
            
            9,699$
            687,865
            
            $
            674,235Long
                TermDomain
                names
            
            
            46,098
            
            
            46,098Deposits
            
            
            28,349
            
            
            22,390$
            74,447
            
            $
            68,488




**5.**  **Intangible
      Assets.**




Intangible
      assets consist of purchased customer lists (acquired in 2007 in connection
      with
      the Biofuels Marketing acquisition discussed in Note 11), which is being
      amortized over an estimated useful life of 18 months. Intangible assets had
      a
      net carrying amount of $183,334 and $233,334 as of March 31, 2008 and December
      31, 2007, respectively.




**6.**  **Debt.**




On
      February 8 and 26, 2008, Laird Cagan, a director and related party, provided
      project financing to the Energy Enzymes subsidiary in the amount of $500,000
      at
      a 10% interest per annum due and payable on December 31, 2008. Additional
      borrowings were made under this loan arrangement in the amount of $300,000
      on
      February 26, 2008, $300,000 on March 14, 2008 , and $600,000 on March 27, 2008.




**7.**  **Operating
      Leases.**




The
      Company has non-cancelable operating leases primarily for office space, and
      a
      research and development facility in Butte, Montana. These leases expire at
      various dates through October 14, 2009. The operating lease for the Butte,
      Montana facility grants the lessee the right to purchase the land and building
      underlying the lease at the end of each lease year.


11


Future
      minimum operating lease payments as of March 31, 2008 are:




**Rental**
              **Payments**2008
                (remainder of 2008)
            
            $
            189,9032009
                and thereafter
            
            
            188,536$
            378,439


**8.**  **Stockholders
      Equity.**




The
      Company is authorized to issue up to 400,000,000 shares of common stock,
      $0.001 par value per share and 65,000,000 shares of preferred stock, $0.001
      par
      value per share.




*Convertible
      Preferred Stock*




Our
      Articles of Incorporation authorize our board to issue up to 65,000,000 shares
      of preferred stock, $0.001 par value per share, in one or more classes or series
      within a class upon authority of the board without further stockholder approval.
      There were 6,270,491 and 6,487,491 shares of Series B preferred stock issued
      and
      outstanding as of March 31, 2008 and December 31, 2007,
      respectively.




Significant
      terms of the designated preferred stock are as follows:




*Voting* *.* Holders
      of our Series B preferred stock are entitled to the number of votes equal to
      the
      number of shares of Common Stock into which the shares of Preferred Stock held
      by such holder could be converted as of the record date. Cumulative voting
      with
      respect to the election of directors is not allowed. Currently, each share
      of
      Series B preferred stock is entitled to one vote per share. In addition, without
      obtaining the approval of the holders of a majority of the outstanding preferred
      stock, the Company cannot:




·
            Increase
                or decrease (other than by redemption or conversion) the total number
                of
                authorized shares of Series B preferred
                stock;




·
            Effect
                an exchange, reclassification, or cancellation of all or a part of
                the
                Series B preferred stock, including a reverse stock split, but excluding
                a
                stock split;




·
            Effect
                an exchange, or create a right of exchange, of all or part of the
                shares
                of another class of shares into shares of Series B preferred stock;
                or




·
            Alter
                or change the rights, preferences or privileges of the shares of
                Series B
                preferred stock so as to affect adversely the shares of such
                series.




*Dividends* .
      Holders
      of all of our shares of Series B preferred stock are entitled to receive
      non-cumulative dividends payable in preference and prior to any declaration
      or
      payment of any dividend on common stock as may from time to time be declared
      by
      the board of directors out of funds legally available for that purpose at the
      rate of 5% of the original purchase price of such shares of preferred stock.
      No
      dividends may be made with respect to our common stock until all declared
      dividends on the preferred stock have been paid or set aside for payment to
      the
      preferred stock holders. To date, no dividends have been declared.




*Liquidation
      Preference* *.* In the
      event of any voluntary or involuntary liquidation, dissolution or winding up
      of
      the Company, the holders of the Series B preferred stock are entitled to
      receive, prior and in preference to any payment to the holders of the common
      stock, $3.00 per share plus all declared but unpaid dividends (if any) on the
      Series B preferred stock. If the Company’s assets legally available for
      distribution to the holders of the Series B preferred stock are insufficient
      to
      permit the payment to such holders of their full liquidation preference, then
      the Company’s entire assets legally available for distribution are distributed
      to the holders of the Series B preferred stock in proportion to their
      liquidation preferences. After the payment to the holders of the Series B
      preferred stock of their liquidation preference, the Company’s remaining assets
      legally available for distribution are distributed to the holders of the common
      stock in proportion to the number of shares of common stock held by them. A
      liquidation, dissolution or winding up includes (a) the acquisition of the
      Company by another entity by means of any transaction or series of related
      transactions to which the Company is party (including, without limitation,
      any
      stock acquisition, reorganization, merger or consolidation but excluding any
      sale of stock for capital raising purposes) that results in the voting
      securities of the Company outstanding immediately prior thereto failing to
      represent immediately after such transaction or series of transactions (either
      by remaining outstanding or by being converted into voting securities of the
      surviving entity or the entity that controls such surviving entity) a majority
      of the total voting power represented by the outstanding voting securities
      of
      the Company, such surviving entity or the entity that controls such surviving
      entity, or (b) a sale, lease or other conveyance of all or substantially all
      of
      the assets of the Company.


12


*Conversion* *.* Holders
      of Series B preferred stock have the right, at their option at any time, to
      convert their shares of Series B preferred stock into common stock at the then
      effective conversion rate. The conversion ratio is subject to adjustment from
      time to time in the event of certain dilutive issuances and events, such as
      stock splits, stock dividends, stock combinations, reclassifications, exchanges
      and the like. In addition, at such time as a registration statement covering
      the
      resale of the shares of common stock issuable upon conversion of the Series
      B
      preferred stock has been declared effective by the Securities and Exchange
      Commission ("SEC"), all outstanding Series B preferred stock shall be
      automatically converted into common stock at the then effective conversion
      rate.




*Registration
      Rights Payment*




Certain
      holders of shares of our common stock (including holders of warrants exercisable
      for common stock) and holders of shares of our Series B preferred stock
      (including holders of warrants exercisable for Series B preferred stock) are
      entitled to have their shares of common stock (including common stock issuable
      upon conversion of Series B preferred stock and exercise of warrants) registered
      under the Securities Act. Registration of these shares under the Securities
      Act
      would result in these shares becoming freely tradable without restriction under
      the Securities Act.




The
      registration rights granted by the Company require the Company to pay to the
      holders of these rights an amount equal to 0.5% of the aggregate dollar amount
      of securities purchased by such investors for each month or portion thereof
      after January 6, 2007 if the Company fails to file a registration statement
      with
      the SEC. The payments are treated as liquidated
      damages and not as a penalty and are full compensation to the investors, and
      shall constitute the investor's exclusive remedy for such events. At the
      Company’s option, the amounts payable as liquidated damages may be paid in cash
      or in shares of the Company's common stock.




The
      maximum time the shares will be restricted is twelve months, as the
      securities may be sold under Rule 144, beginning December 12, 2008, at which
      time the payment obligation shall cease. The shares that Company expects to
      issue to these shareholders for the 12 month period ended December 12, 2008
      shares of its common stock with an aggregate value of $2,274,402, which were
      expensed as a Registration Rights Payment and reflected as a component of Other
      income/expense in the Statement of Operations for the three months ended March
      31, 2008.




**9.****Private
      Placement of Preferred Stock and Warrants**




In
      connection with the sale of our Series A and B preferred stock, we issued to
      our
      placement agent warrants to purchase a number of shares of our common stock
      representing up to 8% of the shares of Series A and Series B preferred stock
      sold. The warrants are exercisable for a period of seven years from the date
      of
      issuance, have a net exercise provision and are transferable. The shares of
      the
      Company’s common stock issuable upon exercise of the warrants must be included
      in any registration statement filed by the Company with the SEC. Further,
      subject to certain conditions, the Company has indemnified the placement agents
      and affiliated broker-dealers against certain civil liabilities, including
      liabilities under the Securities Act.




A
      summary
      of warrant activity for placement agent warrants for 2007 and 2006 is as
      follows:




*Number of*
              *Warrants*
            
            *Weighted-*
              *Average*
              *Exercise*
              *Price*
            
            *Warrants*
              *Exercisable*
            
            Remaining
              Term
              *(years)*Outstanding, December 31, 2007
            
            
            1,548,074
            
            
            2.22
            
            
            1,548,074
            
            
            6.1GrantedExercised
            
            
            (14,583
            )
            
            -
            
            
            (14,583
            )Outstanding,
                March 31, 2008
            
            
            1,533,491
            
            $
            2.22
            
            
            1,533,491
            
            
            5.85





The
      warrants are considered equity instruments. Since they were issued as a cost
      of
      the issuance of the Series A and B preferred stock, the fair value of these
      warrants has effectively been netted against the preferred stock sale
      proceeds.




One
      member of AE Biofuels’ board of directors and a significant shareholder of the
      Company is a registered representative of the placement agent. He received
      a
      portion of the compensation paid to the placement agent and received 976,721
      of
      the warrants issued pursuant to the Series A and B financings (discussed in
      Note
      14).


13


*Warrants*




In
      July
      2007, we issued 1,200,000 revocable warrants to Thames Advisory, Ltd. and paid
      $200,000 in consulting fees with respect to a proposed $200 million debt
      facility. The warrants are earned if the facility is secured before June 30,
      2008. To date no warrants have been earned.




In
      February 2007, we issued 5,000 warrants to a consultant as compensation for
      services rendered. These warrants are immediately exercisable at $3.00 per
      share.




*Common
      Stock Reserved for Issuance*




AE
      Biofuels authorized the issuance of 4,000,000 shares under its 2007 Stock Plan
      for stock option awards, which includes both incentive and non-statutory stock
      options. These options generally expire ten years from the date of grant and
      are
      exercisable at any time after the date of the grant, subject to vesting. Shares
      issued upon exercise prior to vesting are subject to a right of repurchase,
      which lapses according to the vesting schedule of the original
      option.




The
      following is a summary of options granted under the 2007 Stock
      Plan:




**Shares**
            
            **Options
                Outstanding****Available**
            
            **Number**
            
            **Weighted-Average****For Grant**
            
            **of** **Shares**
            
            **Exercise** **Price**Balance
                as of December 31, 2007
            
            
            2,016,000
            
            
            1,984,000
            
            $
            3.00Authorized
            
            
            -Granted
            
            
            -
            
            
            -
            
            $
            -Exercised
            
            
            -
            
            
            -
            
            
            -Canceled
            
            
            -
            
            
            -
            
            
            -Balance
                as of March 31, 2008
            
            
            2,016,000
            
            
            1,984,000
            
            $
            3.00




The
      weighted average remaining contractual term is 9.53 years at March 31, 2008.
      The
      aggregate intrinsic value of the shares outstanding at March 31, 2008 is
      $11,606,000.   The aggregate intrinsic value represents the total pretax
      intrinsic value, based on the excess of the Company’s closing stock price of
      $8.85 as of March 31, 2008 over the option holders’ strike price, which
      would have been received by the option holders had all option holders exercised
      their options as of that date. The weighted average grant fair value of these
      awards is $1.13.




Included
      in the table above are 517,000 options issued to consultants in November 2007.
      These options had an exercise price of $3.00 and generally vest over 3 years.
      At March 31, 2008 the weighted average remaining contractual term was 4.7
      years. The Company recorded expense of $296,071 which reflects the fair value
      valuation and periodic fair value remeasurement of outstanding consultant
      options under Emerging Issues Take Force, or EITF, No. 96-18, “Accounting for
      Equity Instruments That are Issued to Other Employees for Acquiring, or in
      Conjunction with Selling, Goods or Services,” (“EITF 96-18”). The valuation
      using the Black-Scholes model is based upon the current market value of our
      common stock and other current assumptions, including the expected term
      (contractual term for consultant options). The Company records the expense
      related to consultant options using the accelerated expense pattern prescribed
      in EITF 96-18.




Options
      vested and exercisable at March 31, 2008 and December 31, 2007 were 909,250
      and
      817,000, with weighted average exercise prices of $2.87 and $2.85,
      respectively.




*Non-Plan
      Stock Options*




In
      2006,
      the Company issued 290,000 stock options outside of any stock option plan,
      of
      which 50,000 were forfeited during 2007. For the remaining 240,000 options
      outstanding as of March 31, 2008, the weighted average remaining contractual
      term is 7.89 years. The grant date fair value of this award is
      $0.25.




**10.
      Stock- Based Compensation.**




The
      Company incurred stock compensation expense of $364,463 in the three months
      ended March 31, 2008 and $2,223 in the three months ended March 31, 2007 for
      options granted to our general and administrative employees and
      consultants. Therefore, all stock option expense was classified as general
      and
      administrative expense.




*Valuation
      and Expense Information under SFAS 123(R)*




There
      were no options granted within the three month period ended March 31,
      2008.


14


As
      of
      March 31, 2008 and December 31, 2007, there was $2,235,499 and $2,585,196,
      respectively, of total unrecognized compensation expense under FAS 123R, net
      of
      estimated forfeitures, related to stock options that the Company will amortize
      over the next four fiscal years.




**11.****Acquisitions,
      Divestitures and Joint Ventures.**




*E85
      Joint Venture* .
      On
      January 17, 2007, American Ethanol, Inc. received a $5 million advance from
      E85,
      Inc., a Delaware corporation pursuant to a signed Memorandum of Understanding
      between the parties. E85, Inc. is an entity primarily owned by Mr. C.
      Sivasankaran, the founder and Chairman of Siva Limited, Sterling Infotech,
      and
      other businesses.




Subsequently,
      on March 1, 2007, American Ethanol entered into various agreements, including
      a
      Joint Development Agreement, with E85, Inc. The transactions caused no dilution
      to American Ethanol shareholders, and no shares or warrants were issued. Terms
      of the agreement included binding terms related to funding the expected $200
      million construction of American Ethanol’s Sutton, Nebraska ethanol plant, as
      well as non-binding terms related to funding three additional ethanol
      plants.




The
      American Ethanol agreements with E85 included the following terms:




·
            American
                Ethanol agreed to sell all of its interest in and to its wholly-owned
                subsidiary, Wahoo Ethanol, LLC, to E85 for the purchase price of
                $2
                million, resulting in a gain on sale to American Ethanol of
                $854,000;




·
            American
                Ethanol, through its wholly owned subsidiary Sutton Ethanol, LLC,
                was
                developing an ethanol production facility to be located near Sutton,
                Nebraska, which had a permitted production capacity of approximately
                115
                million gallons per year (the "Sutton Project"). E85 agreed to acquire
                a
                50% membership interest in Sutton Ethanol, LLC for a total equity
                contribution of $58 million, of which $24 million was funded on March
                26,
                2007 and American Ethanol agreed to make an additional equity contribution
                to Sutton Ethanol, LLC of $34 million. American Ethanol would retain
                a 50%
                membership interest in Sutton Ethanol, LLC;




·
            In
                addition, American Ethanol would have the lead responsibility to
                negotiate, on behalf of Sutton Ethanol, LLC, the terms and conditions
                of a
                turnkey, engineering, procurement and construction contract ("EPC
                Contract") with a suitable qualified construction contractor
                ("Contractor"), which EPC Contract would have terms and conditions
                sufficient to allow the Sutton Project to obtain, on commercially
                reasonable terms, non-recourse construction and term loan financing
                in an
                amount of approximately $100,000,000 (the "Financing"), including,
                without
                limitation, a completion guarantee from the Contractor that would
                be
                backed by a performance bond. E85 would assist American Ethanol in
                such
                negotiations as reasonably requested by American Ethanol. In addition,
                American Ethanol would have the lead responsibility to negotiate,
                on
                behalf of Sutton Ethanol, LLC, the terms and conditions of the Financing.
                E85 would assist American Ethanol in such negotiations as reasonably
                requested by American Ethanol;




·
            E85
                and American Ethanol agreed that American Ethanol would enter into
                a
                management agreement with Sutton Ethanol, LLC to manage the operation
                of
                the Sutton ethanol facility on such terms and conditions as are consistent
                with an arms length management agreement for ethanol facilities of
                a
                similar type and size;




·
            E85
                and American Ethanol agreed that American Ethanol or its biofuels
                marketing subsidiary would enter into an exclusive marketing agreement
                with Sutton Ethanol, LLC to market ethanol and any other products
                from the
                Sutton ethanol facility for a fee to American Ethanol of one percent
                (1.0%) of gross sales, and on such terms and conditions as are consistent
                with arms length marketing agreements for ethanol facilities of a
                similar
                type and size; and




·
            The
                parties recited their intent to pursue the development and construction
                of
                three additional ethanol facilities on terms and conditions substantially
                similar to those for the Sutton
                Project.




In
      addition, American Ethanol entered into the following credit facilities with
      Siva Limited, a Bermuda corporation, an affiliated entity of E85,
      Inc:




·
            Siva
                Limited agreed to loan American Ethanol up to $4.5 million for the
                purpose
                of investing in American Ethanol’s International Biofuels subsidiary for
                the continued construction of a 50 million gallon biodiesel facility.
                If
                the note was repaid prior to thirty days from the date of the advance,
                no
                interest would be due. If the note was not fully paid in that time
                period,
                interest would accrue at the rate of 2.5% per month and the note
                would
                mature 12 months from the date of closing. Interest was payable quarterly.
                The loan was secured by a pledge by American Ethanol of 6% of the
                membership units of Sutton Ethanol,
                LLC




15




·
            Siva
                Limited agreed to loan American Ethanol $32 million for the purpose
                of
                funding American Ethanol’s remaining equity contribution to Sutton
                Ethanol, LLC. If the funds were borrowed, the loan would bear interest
                at
                the rate of 15% per annum, and would be due and payable on December
                30,
                2007. Interest was payable quarterly. The loan was secured by a pledge
                by
                American Ethanol of 35% of the membership units of Sutton Ethanol,
                LLC.
                American Ethanol was not obligated to borrow under this
                facility.




In
      connection with the agreements with E85 and Siva Limited described above, an
      affiliate of Siva Limited purchased from Janikiram Ajjarapu all 8,100,000 shares
      of common stock of American Ethanol held by Mr. Ajjarapu, a former officer
      and
      director of American Ethanol.




Prior
      to
      American Ethanol's acquisition of the Sutton and Wahoo membership interests,
      Geneva Capital was engaged to perform certain consulting services in exchange
      for cash and stock in the company. In June, 2006, Geneva Capital brought action
      against Sutton and Wahoo claiming breach of contract under these agreements.
      Janikiram Ajjarapu and American Ethanol agreed to settle this litigation with
      Geneva Capital, releasing American Ethanol from any liability related to this
      litigation. In addition, American Ethanol received a reimbursement of legal
      expenses in the amount of $200,000 which was recorded as additional paid in
      capital. The settlement and stock sale transaction, subject to final closing
      conditions, closed in March 2007.




On
      August
      14, 2007 by mutual agreement of the parties, American Ethanol and E-85 dissolved
      their joint venture. American Ethanol purchased E-85’s 50% interest in the
      Sutton Joint Venture for $16 million in cash which they borrowed on a short
      term
      basis from the Joint Venture. As part of this repurchase, American Ethanol
      terminated its design contract with Delta T and wrote off approximately $5.2
      million in design work previously performed by Delta T and its contractors.
      This $5.2 million is included as an expense of the company as of December 31,
      2007. To compensate American Ethanol for this loss, American Ethanol was allowed
      to retain the remaining $8 million invested in the JV by E-85. This $8 million
      gain has been included in the Statement of Operations as gain from sale of
      subsidiary. All previous agreements between American Ethanol and E-85, including
      the loan facilities with Siva Limited, were terminated as of the date of the
      repurchase of the interest in Sutton.




*Public
      Company Acquisition* .
      On June
      23, 2006, American Ethanol acquired approximately 88.3% of the outstanding
      common stock of Marwich from three principal shareholders and directors of
      Marwich for $675,000. The purchase price, net of current year expenses,
      ($662,406) was accounted for as a reduction of Additional Paid in Capital as
      a
      step in a reverse merger transaction. In connection with this transaction,
      the
      three directors of American Ethanol's management, were named as directors
      of Marwich. Also on June 23, 2006, American Ethanol entered into an Agreement
      and Plan of Merger (subsequently amended and restated on July 19, 2007) with
      Marwich pursuant to which American Ethanol would merge with and into Marwich
      and
      (i) each issued and outstanding share of American Ethanol common stock
      (including common stock issued upon conversion of American Ethanol Series A
      preferred stock, which automatically converted into common stock immediately
      prior to the closing of the Merger) and Series B preferred stock was converted
      into Series B preferred stock which is convertible into common stock at the
      holder’s discretion on a one for one basis, respectively, of Marwich, and (ii)
      each issued and outstanding option and warrant exercisable for common stock
      of
      American Ethanol was assumed and converted into an option or warrant exercisable
      for common stock of Marwich. Upon the effectiveness of the Merger, Marwich
      changed its name to AE Biofuels, Inc. The 3,343,200 shares of Marwich purchased
      by American Ethanol were retired upon the completion of the Merger.




On
      December 7, 2007, the Merger was completed and the former shareholders of
      American Ethanol were issued 84,114,998 shares of AE Biofuels, Inc. common
      stock
      in exchange for all of the outstanding shares of American Ethanol common stock,
      6,487,491 shares of AE Biofuels, Inc. Series B preferred stock in exchange
      for
      all of the issued and outstanding shares of American Ethanol’s Series B
      preferred stock, and assumed options and warrants exercisable for 4,229,000
      shares of common stock and 748,074 shares of Series B preferred stock,
      respectively. For accounting purposes, the Reverse Merger was treated as a
      reverse acquisition with American Ethanol as the acquirer and the Company as
      the
      acquired party.




*Marketing
      Company Acquisition.* On
      September 1, 2007, American Ethanol purchased the assets of Biofuels Marketing,
      Inc., a Nevada corporation, in exchange for 200,000 shares of American
      Ethanol common stock valued at $3.00 per share. Of the shares issued, 50% are
      contingent upon the continued employment of Sanjeev Gupta and will be accounted
      for as compensation expense as earned. Of the purchase price, $300,000 was
      assigned to the primary asset acquired, which was a customer list, which is
      being amortized over 18 months.




*Technology
      Company Formation:*On February 28, 2007, in consideration for the agreement
      to fund cellulosic ethanol development efforts, the Company acquired a 51%
      interest in Energy Enzymes, Inc. The Company has the right to acquire the
      remaining 49% for 1,000,000 shares of the Company's common stock upon the
      fulfillment of certain performance milestones. As of March 31, 2008, the Company
      had funded approximately $405,000 under this agreement.




*India
      Company Formation.* On July
      14, 2006, the Company, through a wholly owned subsidiary, International
      Biofuels, Inc. and its wholly owned subsidiary, International Biodiesel, Ltd.,
      LLC, a Mauritius incorporated company, entered into a joint venture biodiesel
      project agreement with Acalmar Oils & Fats Limited, an Indian company. The
      purpose of the joint venture was to build an approximate 50 MMGY biodiesel
      production facility adjacent to the existing palm oil plant in Kakinada, India
      with such fuel being exported from India to the U.S. for sale. By the terms
      of
      the agreement the Company agreed to contribute approximately $15.4 million
      and
      Acalmar agreed to contribute its edible palm oil facility in India to the joint
      venture through a leasing arrangement. On August 22, 2007, the Company and
      Acalmar mutually terminated this lease agreement.




On
      January 23, 2008, International Biofuels, Ltd (IBL) agreed to terminate the
      amended shareholder agreement with Acalmar oils and Fats, Ltd. (Alcamar)
      including termination of Acalmar’s right to own or receive any ownership
      interest in the joint venture biodiesel project. The total cancellation price
      payable by IBL of $900,000 is payable on or before June 30, 2008 and
      classified in our Statement of Operations as a shareholder agreement
      cancellation payment. This joint venture has contributed income of $13,373
      and
      none to the consolidated income for the three months ended March 31, 2008 and
      2007, repectively, principally from foreign currency exchange gains and interest
      income. This income is not subject to U.S. Federal taxation until it is
      repatriated.




16


**12.**  **Land
      options and purchases.**




AE
      Biofuels and its subsidiary, American Ethanol, Inc., has acquired options to
      purchase land in various locations in Nebraska and Illinois. The terms of these
      options are typically from one to two years and provide that AE Biofuels, Inc.
      has the right to acquire the land for a set price per acre subject to the
      satisfaction, in AE Biofuels' sole discretion, of its due
      diligence.




The
      aggregate purchase price of all land currently under option, if all options
      are
      exercised, is $10,014,230. Currently, AE Biofuels is evaluating each site as
      to
      the adequacy of utilities, zoning, subsurface structures and the like and the
      exercise of any option will be dependent upon the result of the Company's
      analysis of these and other factors.




**13.**  **Commitments.**




The
      Company contracted with Desmet Bellastra India Pvt. Ltd. to build a glycerin
      plant in Kakinada, India. At March 31, 2008 and December 31, 2007, construction
      contracts were outstanding for $1.85 million that will be funded with cash
      currently held in our India subsidiary.




**14.** 
      **Related party transactions.**





A
      director and significant shareholder of the Company loaned the Company
      $1,700,000 in the three months ended March 31, 2008. The loan is a short term
      note with a term of nine months from the date of issue and carries a 10% per
      annum interest rate. The monies were used by the Company to pay operating
      expenses and to meet payment related to our obligations operation in
      India.




Chadbourn
      Securities acted as one of the Company’s placement agents with respect to the
      Company’s Series B Preferred Stock offering in 2007. One of the Company’s
      directors and shareholders is an agent of Chadbourn and received payments from
      Chadbourn related to the sale of stock along with other non-related parties.




The
      Company and Eric A. McAfee, the Company's Chief Executive Officer and Chairman
      of the Board, are parties to an agreement pursuant to which the Company pays
      Mr.
      McAfee a monthly fee of $10,000 per month for services rendered to the Company
      as a director and officer. For the three months ended March 31, 2008 and 2007,
      the Company paid Mr. McAfee $30,000 pursuant to this agreement.




The
      Company and CM Consulting are parties to an agreement pursuant to which the
      Company reimburses CM Consulting for a minimum of 20 hours per month of time
      on
      an aircraft owned by CM Consulting until February 2008. The Company paid an
      upfront fee of $360,000 starting February 2006 for 24 months of usage. For
      the
      three months ended March 31, 2008 and 2007, the Company expensed $30,000 and
      $45,000 of this rental fee, respectively. CM Consulting is 50% owned by Eric
      McAfee, a director, officer and significant shareholder of the Company. The
      agreement has not been renewed as of March 31, 2008.




Cagan
      McAfee Capital Partners is owned by two directors of the Company and provides
      office services and advisory services under an advisory agreement with the
      Company. For the three months ended March 31, 2008 and 2007, the Company paid
      Cagan McAfee Capital Partners $33,332 and $37,437 for advisory services, office
      services and travel expenses. The Company engaged Cagan McAfee Capital Partners
      in January 2006 for administrative, paralegal and staff support for $15,000
      a
      month for three years.




The
      Industrial Company (TIC) and Delta-T are companies involved in the design and
      construction of ethanol plants in the United States. In January 2006 they became
      strategic partners and founding shareholders of the Company. In 2006 the Company
      paid TIC and Delta-T approximately $7.5 million for services related to the
      design and initial construction work on the Company’s Sutton Ethanol, LLC
      ethanol plant facility. In August 2007 the Company and TIC terminated their
      relationship, wrote off approximately $5.2 million in design work and
      construction in progress. TIC and Delta-T and are no longer considered strategic
      partners of the Company.




During
      October and December 2007, the Company sold $6,127,727 of commodities to our
      joint venture partner, Acalmar Oils and Fats, Ltd. Amounts due from Alcamar
      Oils
      and Fats, Ltd. have been presented on the balance sheet as Accounts receivable
      -
      related party. These sales were made at prevailing market
      rates.


17


**15.**  **Income
      Tax.**




The
      Company files a consolidated federal income tax return. This return includes
      all
      corporate companies 80% or more owned by the Company as well as the Company’s
      pro-rata share of taxable income from pass-through entities in which Company
      holds an ownership interest. State tax returns are filed on a consolidated,
      combined or separate basis depending on the applicable laws relating to the
      Company and its subsidiaries.




We
      do not
      provide for U.S. income taxes on the undistributed earnings of our foreign
      subsidiaries, as we consider these to be permanently reinvested in the
      operations of such subsidiaries.  At December 31, 2007, these
      undistributed earnings totaled approximately $598,000.  If some of these
      earnings were distributed, some countries may impose withholding taxes.  In
      addition, as foreign taxes have previously been paid on these earnings, we
      would
      expect to be entitled to a U.S. foreign tax credit that would reduce the U.S.
      taxes owed on such distribution.  As such, it is not practicable to
      determine the net amount of the related unrecognized U.S. deferred tax
      liability.




We
      adopted the provisions of FASB Interpretation No. 48, “Accounting for
      Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109”
(“FIN 48”), on January 1, 2007, and there was no impact to our
      financial statements.  FIN 48 clarifies the accounting for uncertainty in
      income tax positions.  FIN 48 provides that the tax affects from an
      uncertain tax position can be recognized in our financial statements only if
      the
      position is more-likely-than-not of being sustained on audit, based on the
      technical merits of the position.  Tax positions that meet the recognition
      threshold are reported at the largest amount that is more-likely-than-not to
      be
      realized.  This determination requires a high degree of judgment and
      estimation.  We periodically analyze and adjust amounts recorded for our
      uncertain tax positions, as events occur to warrant adjustment, such as when
      the
      statutory period for assessing tax on a given tax return or period expires
      or if
      tax authorities provide administrative guidance or a decision is rendered in
      the
      courts.  Most of our unrecognized tax benefits would affect our effective
      tax rate if recognized.  Furthermore, we do not reasonably expect the total
      amounts of unrecognized tax benefits to significantly increase or decrease
      within the next 12 months.




As
      of
      March 31, 2008 and December 31, 2007, our unrecognized tax benefits were not
      significant.




**16.****Contingent
      Liabilities.**




On
        March
        28, 2008, the Cordillera Fund, L.P. (“Cordillera”) filed a complaint in the
        Clark County District Court of the State of Nevada against American Ethanol,
        Inc. and AE Biofuels, Inc. The complaint seeks a judicial declaration that
        Cordillera has a right to payment from the Company for its American Ethanol
        shares at fair market value pursuant to Nevada’s Dissenters’ Rights
        Statute, a judicial declaration that Cordillera is not a holder of Series
        B
        Convertible Preferred Stock in AE Biofuels under the provisions of that statute;
        and a permanent injunction compelling the Company to apply the Dissenters’
Rights Statute to Cordillera’s shares and pay Cordillera reimbursement for its
        attorneys fees and costs.
 
 On
        April
        29, 2008, Defendants filed a Motion to Transfer Venue, seeking a transfer
        to the
        Second Judicial District Court of the State of Nevada, located in Washoe
        County,
        Nevada. The hearing for this Motion is set for June 3, 2008 in the Clark
        County
        District Court of the State of Nevada.
 
 The
        Company intends to vigorously defend this disputed claim of entitlement under
        the Nevada Dissenters’ Rights Statute.




**17.**  **Subsequent
      Events.**




On
      April
      14, 2008 and May 12, 2008 an aggregate additional borrowing in the amount of
      $275,000 was drawn against the project financing loan between Laird Cagan,
      a
      director, and Energy Enzymes.




18




**Item
        2. Management's Discussion And Analysis Of Financial Condition And Results
        Of
        Operations**
  *The
        following discussion should be read in conjunction with the AE Biofuels,
        Inc.
        consolidated financial statements and accompanying notes included elsewhere
        in
        this report. The following discussion contains forward-looking statements
        that
        reflect the plans, estimates and beliefs of AE Biofuels. Inc. The actual
        results
        could differ materially from those discussed in the forward-looking statements.
        Factors that could cause or contribute to these differences include those
        discussed below and elsewhere in this Report and the Annual Report 10-K,
        particularly in “Risk Factors.” All references to years relate to the calendar
        year ended December 31 of the particular year.*
  **Overview**
  The
        audited consolidated financial statements include the accounts of AE Biofuels,
        Inc. (“AE Biofuels”), a Nevada corporation, and its subsidiaries. We are in the
        business of developing next-generation ethanol and biodiesel plants. We have
        not
        yet commenced production operations and do not have a long operational
        history.
  AE
        Biofuels, Inc. was originally incorporated in California on September 12,
        2001
        as Great Valley Ventures LLC, although no operating agreement was adopted
        and no
        capital was contributed until November 29, 2005. From November 2005 through
        December 2005, Great Valley commenced activities with the addition of key
        advisors, management, and additional founding shareholders. On January 12,
        2006,
        Great Valley Ventures was renamed American Ethanol, LLC. On February 23,
        2006,
        American Ethanol, LLC merged into American Ethanol, Inc., a Nevada corporation.
        Accordingly, AE Biofuels consolidated financial statements include the assets,
        liabilities and operations of the predecessor LLC as if the merger had taken
        place on November 29, 2005, the date of the LLC’s inception. AE Biofuels is in
        the development stage with its efforts being principally devoted to acquiring
        real estate, constructing new plants, securing feedstock sources,
        developing new processing technologies, engineering manufacturing systems,
        and
        equity raising activities.
  On
        June
        23, 2006, American Ethanol acquired 88.3% of the outstanding common stock
        of
        Marwich II, Ltd., a Colorado corporation pursuant to a stock purchase agreement
        between American Ethanol and the principal shareholders of Marwich.
        Marwich-Colorado was a shell company and had no current operations. Also
        on June
        23, 2006, American Ethanol entered into an Agreement and Plan of Merger with
        Marwich-Colorado pursuant to which American Ethanol agreed to merge with
        Marwich-Colorado. On July 19, 2007, Marwich-Colorado, Marwich II, Ltd., a
        Nevada
        corporation and wholly-owned subsidiary of Marwich-Colorado (“Marwich-Nevada”),
        AE Biofuels, Inc., a Nevada corporation and wholly owned subsidiary of
        Marwich-Nevada (“Merger Sub”), and American Ethanol entered into an Amended and
        Restated Agreement and Plan of Merger (the “Amended Merger Agreement”). The
        Amended Merger Agreement superseded the Agreement and Plan of Merger entered
        into on June 23, 2006.
  Pursuant
        to the Amended Merger Agreement, Marwich-Colorado agreed to reincorporate
        into
        the State of Nevada (the “Reincorporation”) and, subject to the Reincorporation,
        American Ethanol agreed to merge with Merger Sub with American Ethanol being
        the
        surviving corporation (the “Reverse Merger’). The Reincorporation and Reverse
        Merger were consummated on December 7, 2007. In connection with the Reverse
        Merger, Marwich-Nevada issued to the former shareholders of American Ethanol
        84,114,998 shares of its common stock in exchange for all of the outstanding
        shares of American Ethanol common stock, 6,487,491 shares of Series B preferred
        stock in exchange for all of the issued and outstanding shares of American
        Ethanol Series B preferred stock and assumed options and warrants exercisable
        for 4,229,000 shares of common stock and 748,074 shares of Series B preferred
        stock, respectively. Marwich then changed its name to AE Biofuels, Inc. As
        a
        result, American Ethanol became our wholly owned subsidiary and the former
        stockholders of American Ethanol became the controlling stockholders of the
        Company.
  **Company
        Organization**
  AE
        Biofuels, Inc., through its wholly owned subsidiary American Ethanol, Inc.,
        owns
        entities created to transact business for plant or functional purposes. Through
        our subsidiary International Biodiesel, Inc., we own International Biofuels,
        Ltd, a Mauritius corporation and its subsidiary Universal Biofuels Private
        Ltd,
        an India company. Universal Biofuels Private Ltd. holds as its primary asset
        a
        biodiesel plant with the nameplate capacity of 50 million gallons
        annually in Kakinada, India. Two other subsidiaries of American Ethanol,
        Sutton Ethanol, LLC (“Sutton) and Danville Ethanol, Inc, hold future plant
        development assets. Biofuels Marketing, Inc., a Delaware
        corporation was acquired by us on September 1, 2007, as a marketing
        organization whose purpose is to acquire feedstock and sell the commodities
        related to our ethanol and biodiesel plants. Energy Enzymes, Inc. is held
        as a 51% owned joint venture for the development of next-generation cellulosic
        ethanol. The other 49% interest in Energy Enzymes is held by Renewable
        Technology Corporation (“RTC”).
  19
  On
        January 17, 2007, we entered into a joint venture agreement with E85 to develop
        the land owned by Sutton Ethanol, LLC using property contributed by us
        to the joint venture. The joint venture began development of the property,
        principally by hiring the services of contractors and engineering firms.
        On
        August 14, 2007 by mutual consent of the parties the joint venture was
        terminated. Upon termination, the contract with the principal engineering
        services firm was terminated, and the property was returned to us.
  On
        March
        27, 2008, the Board of Directors approved the following company
        structure:
  
 
 **Three
        Months Ended March 31, 2008 Compared To Three Months Ended March 31, 2007**
  **Revenues**
  We
        had no
        revenues for either period, March 31, 2008 or March 31, 2007.
  **Expenses**
  *Expenses* .
        For the
        period from November 29, 2005 (inception) through March 31, 2008, the Company
        was considered a development stage enterprise under Statement of Financial
        Accounting Standards (“SFAS”) No. 7 *Development
        Stage Enterprises* . We
        have been devoting substantially all of our efforts to the establishment
        of
        biodiesel and ethanol plants and securing feedstocks to operate those plants.
        We
        will remain a development stage company until planned principal operations
        have
        commenced and significant revenues have been generated from those
        operations.
  *Research
        and Development Expenses*
  During
        2007, we formed a joint venture with Renewable Technology Corporation (RTC)
        for
        the purpose of developing next-generation ethanol production processes. Under
        this joint venture agreement in 2007, we acquired 51% of Energy Enzymes,
        Inc.
        and have subsequently funded the salaries and expenses for their small team
        of
        scientists to optimize cellulosic ethanol technology for large-scale commercial
        implementation. For the three months ended March 31, 2008, this team spent
        $124,349 consisting of consulting services to the key scientists of $60,000
        and
        the balance in various components of building a commercial demonstration
        plant.
  *General
        and Administrative Expenses*
  Principal
        areas of spending for general and administrative expenses are in the areas
        of
        employee compensation and professional services. We summarize our spending
        into
        eight components as follows:
  Three Months Ended
              
              
              Three Months EndedMarch 31, 2008
              
              
              March 31, 2007%
              
              
              %Salaries,
                  wages and compensation
              
              
              33
              %
              
              
              40
              %Supplies
                  and services
              
              
              2
              %
              
              
              7
              %Repair
                  and maintenance
              
              
              0
              %
              
              
              0
              %Taxes,
                  insurance, rent and utilities
              
              
              6
              %
              
              
              3
              %Professional
                  services
              
              
              50
              %
              
              
              37
              %Depreciation
                  and amortization
              
              
              3
              %
              
              
              0
              %Travel
                  and entertainment
              
              
              6
              %
              
              
              11
              %Miscellaneous
                  expense
              
              
              0
              %
              
              
              2
              %Total
              
              
              100
              %
              
              
              100
              %
  20
  The
        single largest component of 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 three months ended March 31,
        2008,
        we spent approximately $970,357 on professional services including a non-cash
        stock compensation charge of approximately $244,761 for stock and option
        grants
        to key consultants and advisors. For the three months ended March 31, 2007,
        we
        spent approximately $537,935 on professional services of which none was for
        stock based compensation. On an inception to date basis, we spent $6,665,259
        on
        professional services, including $549,373 of compensation for stock and options
        issued to consultants.
  The second
        largest component of general and administrative expense is employee
        compensation, including related stock compensation. The number of employees
        grew
        slightly from 11 employees at March 31, 2007 to 12 employees at March 31,
        2008.
        Compensation expense grew from approximately $582,305 for the three months
        ended
        March 31, 2007 to approximately $651,270 for the three months ended March
        31,
        2008. The increase was principally driven by the non-cash, stock compensation
        of
        approximately $119,702 for the three months ended March 31, 2008 compared
        to the
        stock compensation of $45,409 for the three months ended March 31, 2007.
        On an
        inception to date basis, we spent $5,307,717 on employee compensation, including
        approximately $1,310,897 of stock compensation.
  On
        September 1, 2007, the sales and marketing organization was developed through
        the acquisition of Biofuels Marketing. The Company incurred costs for two
        employees in 2007 of approximately $94,000 plus travel expneses and during
        the
        three months ended March 31, 2008 of approximately $47,000 plus travel expenses.
        Since the Company did not record any sales, these costs are considered start-up
        costs and accordingly included in general and administrative. At such time
        as
        the Company generates revenues, these costs will be captured as sales and
        marketing activities.
  **Other
        Income / Expense**
  During
        the three months ended March 31, 2008, we purchased and resold glycerin as
        part
        of a trading business. These sales resulted in profits of $26,534 on sales
        of
        $205,270.
  In
        January the Company was required to file a registration statement for
        stockholders of Series A and B Preferred stock under a Registration Rights
        Agreement or pay in cash or issue shares of stock to these investors in an
        amount equal to 0.5% per month of their investment account. This expense
        related
        to this payment from the period from January through December 2008 is reflected
        as a component of Operating Loss during the three months ended March 31,
        2008 in
        the amount of $2,274,402.
  On
          January 23, 2008, International Biofuels, Ltd (IBL) agreed to terminate
          the
          amended shareholder agreement with Acalmar oils and Fats, Ltd. (Alcamar)
          including termination of Acalmar’s right to own or receive any ownership
          interest in the joint venture biodiesel project. The total cancellation
          price
          payable by IBL of $900,000 is payable on or before June 30, 2008 and
          classified in our Statement of Operations as a shareholder agreement
          cancellation payment. This joint venture has contributed income of $13,373
          and
          none to the consolidated income for the three months ended March 31, 2008
          and
          2007, repectively, principally from foreign currency exchange gains and
          interest
          income. This income is not subject to U.S. Federal taxation until it is
          repatriated.
 **Liquidity**
  Through
        December 31, 2007, we have raised approximately $32,000,000 (net of expenses)
        through the sale of equity; $2,000,000 from the sale of our subsidiary, Wahoo
        Ethanol, LLC; and $8,206,000 million pursuant to the repurchase of our interest
        in Sutton Ethanol, LLC. At December 31, 2007 we had approximately $510,000
        in
        cash and cash equivalents held in our domestic entities and $2,845,000 held
        as
        short term marketable securities in offshore subsidiaries. The funds that
        we
        have raised to date have been used for the development of our 50 million
        gallon
        biodiesel facility in India (approximately $15,400,000 million), a land
        acquisition in Illinois for development of an ethanol facility (approximately
        $2,300,000), and a land acquisition and improvements in Nebraska for development
        of an ethanol facility (approximately $11,000,000), four land options in
        Illinois and Nebraska for possible future development of ethanol facilities
        (approximately $610,000), and operating expenses.
  We
        will
        need significantly more cash to implement our plan to build our next-generation
        ethanol plants and continue to develop biodiesel facilities in India. We
        intend
        to raise these funds through the sale of additional equity either in AE Biofuels
        or one of our subsidiaries, joint ventures, construction loans, long-term
        debt
        financings and operating cash flows. We estimate the construction costs of
        a 110
        million gallon per year (“MMGY”) ethanol plant at today’s cost to be
        approximately $240 million with an additional $36 million required for working
        capital. We estimate that the cost to develop a biodiesel facility in India
        is
        approximately $30 million with an additional $6 million required for working
        capital. Therefore, we must raise a significant amount of capital to meet
        our
        plan and goals. We contracted with Desmet Bellastra India Pvt. Ltd. to build
        a
        glycerin plant in Kakinada, India. At March 31, 2008, we had construction
        contracts outstanding for $1.85 million that will be funded with cash currently
        held in our India subsidiary.
  Due
        to
        the risk factors discussed in our annual report on form 10-K, there can be
        no
        assurance that we will be successful in raising the additional funds necessary
        to carry out management’s plans for the future. Management estimates that it
        will need to obtain additional debt or equity funds for each ethanol and
        biodiesel facility it builds, plus cash to continue its development efforts.
        The
        Company today is spending approximately $550,000 per month to cover its general
        and administrative costs. Funds available at March 31, 2008 are only sufficient
        to cover less than one month of our domestic operating costs. During the
        three
        months ended March 31, 2008, we borrowed $1,700,000 from Laird Cagan, a director
        and related party, in order to meet our funding obligations with respect to
        our Energy Enzymes subsidiary and meet current obligations. Subsequent to
        March
        31, 2008, we borrowed an additional $275,000 under this credit
        facility.
  21
  **Critical
        Accounting Policies**
  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 judgments, often as a
        result of the need to make estimates about the effects of matters that are
        inherently uncertain.
  *Impairment
        of Intangible and Long-Lived Assets*  ****
  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 purchase price 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.
        This production facility was constructed with our partner, Acalmar Oils and
        Fats, during 2007. The first phase of the plant is currently operational
        and we
        are evaluating various feedstock agreements in order to fully utilize the
        facility. We plan to expand operations in Kakinada, India to include a
        pharmaceutical-grade glycerin processing facility, which is expected to be
        fully
        operational by the third quarter of 2008. Costs for building the plant remain
        in
        construction-in-progress at March 31, 2008, and will be reclassified once
        the
        plant is fully operational and placed in service.
  We
        evaluate impairment of long-lived assets in accordance with SFAS No. 144, 
“ *Accounting
        for the Impairment or Disposal of Long-Lived Assets.* ”
We
        assess the impairment of long-lived assets, including property and equipment
        and
        purchased intangibles subject to amortization, when events or changes in
        circumstances indicate that these assets have been impaired and we accordingly
        write them down to their new fair value. Forecasts of future cash flows are
        critical judgments in this process and are based on our experience and knowledge
        of our operations and the industries in which we operate and are critical
        to our
        impairment assessments. These forecasts could be significantly affected by
        future changes in market conditions, the economic environment, and capital
        spending decisions of our customers and inflation. For the year ended December
        31, 2007 we recognized an impairment of approximately $5,114,000 due to
        non-recoverable engineering costs associated with the development efforts
        at our
        Sutton site.
  *Stock-Based
        Compensation*
  Effective
        January 1, 2006, we adopted the fair value recognition provisions of
        SFAS No.123 (Revised 2004), “ *Share-Based
        Payment* ”
(“SFAS
        123(R)”), where the fair value of each option is adjusted to reflect only those
        shares that are expected to vest. Our implementation of SFAS 123(R) used
        the modified-prospective-transition method where the compensation cost related
        to each unvested option as of January 1, 2006, was recalculated and any
        necessary adjustment was reported in the first quarter of adoption.
  We
        made
        the following estimates and assumptions in determining fair value:
  ·
              *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.
  ·
              *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 historical volatility of
                  the comparable companies’ stock.
  ·
              *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.
  ·
              *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.
  22
  Given
        the
        absence of an active market for our common stock as a private company prior
        to
        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:
 ·
                the
                    prices for our convertible preferred stock sold to outside investors
                    in
                    arm’s-length transactions;
  ·
                the
                    rights, preferences and privileges of that convertible preferred
                    stock
                    relative to those of our common
                    stock;
  ·
                our
                    operating and financial
                    performance;
  ·
                the
                    hiring of key personnel;
  ·
                the
                    introduction of new products;
  ·
                our
                    stage of development and revenue
                    growth;
  ·
                the
                    fact that the option grants involved illiquid securities in a
                    private
                    company;
  ·
                the
                    risks inherent in the development and expansion of our
                    operations; and
  ·
                the
                    likelihood of achieving a liquidity event, such as an initial
                    public
                    offering or a sale of the Company, for the shares of common stock
                    underlying the options given prevailing market
                    conditions.
 **Recently
        Issued Accounting Pronouncements**
  *Recent
        Accounting Pronouncements*
  In
        September 2006, the FASB issued Statement No. 157, “ *Fair
        Value Measurements* ”
        (“SFAS 157”). SFAS 157 defines fair value, establishes a framework and
        gives guidance regarding the methods used in measuring fair value, and expands
        disclosures about fair value measurements. SFAS 157 is applicable whenever
        another accounting pronouncement requires or permits assets and liabilities
        to
        be measured at fair value. SFAS 157 does not expand or require any new fair
        value measures, however, the application of this statement may change current
        practice. On January 1, 2008, the Company adopted SFAS 157 and the adoption
        of
        this statement had no material effect on the Company’s financial
        statements.
  In
        February 2007, the FASB issued SFAS No. 159, “ *The
        Fair Value Option for Financial Assets and Financial Liabilities-Including
        an
        Amendment of FASB Statement No. 115* ”
("SFAS
        159") . This statement permits entities to choose to measure many financial
        instruments and certain other items at fair value. The fair value option
        may be
        elected on an instrument-by-instrument basis, with few exceptions. SFAS 159
        also
        establishes presentation and disclosure requirement to facilitate comparisons
        between companies that choose different measurement attributes for similar
        assets and liabilities. On January 1, 2008, the Company adopted SFAS 159
        and the
        adoption of this statement had no material effect on the Company’s financial
        statements.
  In
        December 2007, the FASB issued SFAS No. 141(R), “ *Business
        Combinations* ”
(“SFAS
        141R”). This statement changes the accounting for acquisition transaction costs
        by requiring them to be expensed in the period incurred, and also changes
        the
        accounting for contingent consideration, acquired contingencies and
        restructuring costs related to an acquisition. Also in December 2007, the
        FASB
        issued SFAS No. 160, “ *Noncontrolling
        Interests in Consolidated Financial Statements-an amendment of ARB No.
        51* ”
(“SFAS
        160”). This statement will change the accounting and reporting for minority
        interests, which will be recharacterized as noncontrolling interests, classified
        as a component of equity and accounted for at fair value. SFAS 141(R) and
        SFAS
        160 are effective for the Company’s 2009 financial statements. Early adoption is
        prohibited. The effect of adoption SFAS 141(R) and SFAS 160 will have on
        the
        Company’s financial statements will depend on the nature and size of
        acquisitions we complete after we adopt SFAS 141(R) and SFAS 160.
  23
  **Item
        3. Quantitative And Qualitative Disclosures About Market
        Risks**
  *Interest
        Rate Sensitivity*
  We
        had
        cash, cash equivalents and marketable securities totaling $1,444,514 and
        $3,356,294 at March 31, 2008 and December 31, 2007, respectively. These amounts
        were invested primarily in money market funds and short term time deposits.
        The
        unrestricted cash and cash equivalents and marketable securites are held
        for
        working capital purposes. We do not enter into investments for trading or
        speculative purposes. We believe that we do not have any material exposure
        to
        changes in the fair value as a result of changes in interest rates. Declines
        in
        interest rates, however, will reduce future investment income.
  At
        March
        31, 2008 and December 31, 2007, we had $1,712,508 and $0 million of fixed-
        rate,
        short-term debt outstanding, respectively.
  **Item
        4T. Controls And Procedures**
  **Evaluation
        of Disclosure Controls and Procedures**
  The
        Company's management is responsible for establishing and maintaining a system
        of
        disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
        under the Exchange Act of 1943, as amended) that is designed to ensure that
        information required to be disclosed by the Company in the reports that the
        Company files or submits under the Exchange Act is recorded, processed,
        summarized and reported, within the time periods specified in the Commission's
        rules and forms. Disclosure controls and procedures include, without limitation,
        controls and procedures designed to ensure that information required to be
        disclosed by an issuer in the reports that it files or submits under the
        Exchange Act is accumulated and communicated to the issuer's management,
        including its principal executive officer or officers and principal financial
        officer or officers, or persons performing similar functions, as appropriate
        to
        allow timely decisions regarding required disclosure. Based upon their
        evaluation, our Chief Executive Officer and Chief Financial Officer have
        concluded that as of December 31, 2007 our disclosure controls and procedures
        were not effective.
  **Changes
        in Internal Control over Financial Reporting:**
  There
        were no changes in our internal control over financial reporting, other than
        those stated above, during our most recent fiscal quarter that have materially
        affected, or are reasonably likely to materially affect, our internal control
        over financial reporting.
  **Remediation
        Efforts to Address Material Weakness in Internal Control over Financial
        Reporting**
  Throughout
        the three months ended March 31, 2008, we began the implementation of a
        remediation plan to address the material weaknesses identified during the
        audit
        of our fiscal year ended December 31, 2007. The
        control deficiencies that gave rise to the material weaknesses related to
        the
        fact that our accounting resources did not include enough people with the
        detailed knowledge, experience and training in the selection and application
        of
        certain accounting principles generally accepted in the United States of
        America
        (GAAP) to meet our financial reporting needs. These control deficiencies
        contributed to material weaknesses in internal control with respect to
        segregation of duties, controls over financial reporting at the India
        subsidiary, stockholders equity and share-based compensation, acquisitions
        as
        well as financial statement presentation and disclosures.We have hired
        consultants with the necessary accounting knowledge, experience and training
        to
        meet the needs of our organization. We will continue to implement process
        changes and hire employees or consultants to address the material weaknesses
        noted in the internal controls over financial reporting for fiscal 2007.
        Once
        placed in operation for a sufficient period of time, we will evaluate the
        overall effectiveness of these new process changes to determine if they are
        operating effectively.
  **Inherent
        Limitations of Internal Controls**
  Our
        management, including our CEO and CFO, does not expect that our disclosure
        controls and procedures or our internal controls will prevent all error and
        all
        fraud. A control system, no matter how well conceived and operated, can provide
        only reasonable, not absolute, assurance that the objectives of the control
        system are met. Because of the inherent limitations in all control systems,
        no
        evaluation of controls can provide absolute assurance that all control issues
        and instances of fraud, if any, within the Company have been detected. These
        inherent limitations include the realities that judgments in decision-making
        can
        be faulty, and that breakdowns can occur because of a simple error or mistake.
        Additionally, controls can be circumvented by the individual acts of some
        persons, by collusion of two or more people, or by management override of
        the
        control. The design of any system of controls also is based in part upon
        certain
        assumptions about the likelihood of future events, and there can be no assurance
        that any design will succeed in achieving its stated goals under all potential
        future conditions. Over time, controls may become inadequate because of changes
        in conditions, or the degree of compliance with the policies or procedures
        may
        deteriorate. Because of the inherent limitations in a cost-effective control
        system, misstatements due to error or fraud may occur and not be
        detected.
  24
  **PART
        II OTHER INFORMATION**
  **Item
        1. Legal Proceedings**
  Mr.
        McAfee is a founding shareholder or principal investor in 12 publicly traded
        companies and approximately 20 private companies. Mr. McAfee served as the
        vice
        chairman of the Board of Directors of Verdisys, Inc., a publicly traded company,
        in 2003. To resolve potential litigation and to provide resolution of any
        issues, Mr. McAfee and the Commission entered into a settlement agreement
        under
        which Mr. McAfee neither admitted nor denied causing any action by Verdisys,
        Inc. to fail to comply with Section 10(b) of the Exchange Act and Rule 10b-5
        and
        agreed to a payment of $25,000.
  On
        March
        28, 2008, the Cordillera Fund, L.P. ("Cordillerra") filed a complaint in
        the Clark County District Court of the State of Nevada against American Ethanol,
        Inc. and AE Biofuels, Inc. The complaint seeks a judicial declaration that
        Cordillera has a right to payment from the Company for it's American Ethanol
        shares at fair market value persuant to Nevada's Dissenters' Rights Statute,
        a
        judicial declaration that Cordillera is not a holder of Series B Convertible
        Preferred Stock in AE Biofuels under the provisions of the statute; and a
        permanent injunction compelling the Company to apply the Dissenters' Rights
        Statute to Cordillera's shares and pay Cordillera reimbursment for it's
        attorneys fees and costs.
  On
        April 29, 2008, Defendants filed a Motion to Transfer
        Venue, seeking a transfer to the Second Judicial Court of the State of Nevada,
        located in Washoe County, Nevada. The hearing for this Motion is set for
        June 3,
        2008 in the Clark County District Court of the State of Nevada.
  The
        Company intends to vigorously defend this disputed
        claim of enititlement under the Nevada Dissenters' Rights Statute.
  **Item
        1A. Risk Factors**
  ***There
        has been no change in the Company's risk factors since the Company’s Annual
        Report on Form 10-K filed with SEC on April 1, 2008.***
  **Item
        2. Unregistered Sales Of Equity Securities And Use Of
        Proceeds**
  ***None***
  **Item
        3. Defaults Upon Senior Securities**
  ***None***
  **Item
        4. Submission Of Matters To A Vote Of Security Holders**
  ***None***
  **Item
        5. Other Information**
  ***None***
  **Item
        6. Exhibits**
  31.1
              Certifications
                  pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
                  Act
                  of 1934, as amended, as adopted pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.31.2
              Certifications
                  pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
                  Act
                  of 1934, as amended, as adopted pursuant to Section 302 of the
                  Sarbanes-
                  Oxley Act of 2002.32.1
              Certifications
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002.32.2
              Certifications
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002.
  25
  **SIGNATURES**
  In
        accordance with the requirements of the Exchange Act, the registrant caused
        this
        Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto
        duly authorized.
 
 Date:
        May
        14, 2008
 
 **AE
                  Biofuels, Inc.**/s/ Eric
                  A. McAfeeEric
                  A. McAfeeChief
                  Executive Officer
                (Principal
                  Executive Officer)
  26