**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-K**




**xANNUAL
      REPORT PURSUANT
      TO SECTION 13 OR 15(d) OF THE SECURITIES**


**EXCHANGE
      ACT OF 1934**




For
      the
      fiscal year ended December 31, 2007





Commission
      file number: 000-51354




**AE
      BIOFUELS, INC.**


(Name
      of
      Small Business Issuer in its charter)




Nevada
            84-0925128(State
                or other jurisdiction of incorporation or organization)
            (I.R.S.
                Employer Identification Number)




20400
      Stevens Creek Blvd., Suite 700


Cupertino,
      California 95014




Issuer's
      telephone number: (408)
      213-0940




Securities
      registered under Section 12(b) of the Exchange Act: None




Securities
      registered under Section 12(g) of the Exchange Act:




**Common
      Stock, Par Value $.001**


(Title
      of
      class)





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. Yes oNo x





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act. Yes oNo x





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
o





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
      be contained, to the best of registrant's knowledge, in definitive proxy or
      information statements incorporated by reference in Part III of this Form 10-K
      or any amendment to this Form 10-K. x





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





Large
      accelerated filer oAccelerated
      filer oNon-accelerated filer oSmaller
      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
oNo
x




The
      aggregate market value of voting and non-voting common equity held by
      non-affiliates of the registrant was approximately $49,402,915 as of June 29,
      2007 based on the average bid and asked price on the Over-The-Counter
      Bulletin Board reported for such date. This calculation does not reflect a
      determination that certain persons are affiliates of the registrant for any
      other purpose.




The
      registrant’s revenues for fiscal year end December 31, 2007 were $0.





The
      number of shares outstanding of the registrant’s Common Stock
      o n March
      15, 2008 was 84,557,462 shares.





**DOCUMENTS
      INCORPORATED BY REFERENCE**




Portions
      of the Registrant's Proxy Statement for its 2008 Annual Meeting of Stockholders
      (the "Proxy Statement"), to be filed with the Securities and Exchange
      Commission, are incorporated by reference into Part III of this Form
      10-K.











**TABLE
      OF CONTENTS**





Page**PART
                I**Special
                Note Regarding Forward-Looking Statements
            
            
            1Item
                1. Business
            
            
            1Item
                1A. Risk Factors
            
            
            8Item
                2. Properties
            
            
            17Item
                3. Legal Proceedings
            
            
            17Item
                4. Submission of Matters to a Vote of Security Holders
            
            
            18**PART
                II**Item
                5. Market for Registrant's Common Equity, Related Stockholder Matters
                and Issuer Purchases of Equity Securities
            
            
            19Item
                6. Selected Financial Data - As a Smaller Reporting Company this
                item is
                not requiredItem
                7. Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
            
            
            21Item
                7A. Quantitative and Qualitative Disclosures About Market Risk -
                As a
                Smaller Reporting Company, this item is not requiredItem
                8. Financial Statements and Supplementary Data
            
            
            26Item
                9. Changes in and Disagreements with Accountants on Accounting and
                Financial Disclosure
            
            
            26Item
                9A(T). Controls and Procedures
            
            
            27Item
                9B. Other Information
            
            
            27**PART
                III**Item
                10. Directors, Executive Officers and Corporate Governance
            
            
            27Item
                11. Executive Compensation
            
            
            28Item
                12. Security Ownership of Certain Beneficial Owners and Management
                and
                Related Stockholder Matters
            
            
            28Item
                13. Certain Relationships and Related Transactions, and Director
                Independence
            
            
            28Item
                14. Principal Accountant Fees and Services
            
            
            28Item
                15. Exhibits and Financial Statement Schedules
            
            
            29Index
                to Financial Statements
            
            
            F-0SIGNATURES









**PART
      I**





**SPECIAL
      NOTE REGARDING FORWARD—LOOKING STATEMENTS**





On
      one or
      more occasions, we may make forward-looking statements in this Annual Report
      on
      Form 10-K 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.
      These forward-looking statements are only our predictions and involve numerous
      assumptions, risks and uncertainties, including, but not limited to those listed
      below and those business risks and factors described elsewhere in this report
      and our other Securities and Exchange Commission filings.





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.





**Item
      1. Business**





***History***


AE
        Biofuels, Inc. (the “Company”) was incorporated as Marwich II, Ltd. under the
        laws of the State of Colorado on August 16, 1983 to engage in the acquisition
        of
        assets and properties which management believed had good business potential.
        In
        the course of its business the Company acquired a number of real estate and
        promissory note properties.
 
 The
        Company subsequently sold its properties, ceased active business operations
        and
        was administratively dissolved by the Colorado Secretary of State effective
        January 1, 1991. On October 13, 2004, articles of reinstatement were filed
        with
        the Colorado Secretary of State and the Company became current in its reporting
        obligations under the Securities Exchange Act of 1934, as amended (the “Exchange
        Act”).
 
 On
        June
        23, 2006, the Company and American Ethanol entered into an Agreement and
        Plan of
        Merger, which agreement was amended and restated on July 19, 2007 (the “Merger
        Agreement”). Pursuant to the Merger Agreement, the Company agreed to
        reincorporate into the State of Nevada (the “Reincorporation”) by means of a
        merger with and into Marwich II, Ltd., a Nevada corporation and wholly-owned
        subsidiary (“Marwich-Nevada”) and subject to the Reincorporation, American
        Ethanol agreed to merge with a wholly-owned subsidiary of Marwich-Nevada
        with
        American Ethanol as the surviving corporation (the “Reverse Merger”).
 
 On
        December 7, 2007, we completed the Reincorporation and the Reverse Merger
        and
        issued to the former shareholders of American Ethanol 84,114,998 shares of
        our
        common stock in exchange for all of the outstanding shares of American Ethanol
        common stock, 6,487,491 shares of our 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. The Company then changed its name to AE Biofuels,
        Inc.
 
 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.
        As
        a result, the business and financial information included in this report
        is the
        business and financial information of AE Biofuels, Inc. and its subsidiaries
        on
        a consolidated basis.




1


**General**




We
      are a
      developer of next-generation ethanol and biodiesel plants. Currently, we,
      through our subsidiary Sutton Ethanol, LLC, own one site in Nebraska, planned
      for approximately 110 million gallons of annual ethanol production and, through
      our subsidiary Danville Ethanol Inc., own one site in Illinois permitted for
      approximately 110 million gallons of annual ethanol production. We also have
      rights to acquire four additional ethanol plant sites in Illinois, three of
      which are fully permitted for approximately 110 million gallons of annual
      ethanol production.


In
        addition, we are constructing an integrated cellulose/starch ethanol
        demonstration plant in Butte, Montana. The Butte facility is expected to
        be
        fully operational in the second calendar quarter of 2008, and its primary
        purpose is to optimize our patent-pending enzyme ethanol process for commercial
        implementation. Finally, we have constructed a 50 million gallon per annum
        biodiesel facility in the port city of Kakinada, State of Andhra Pradesh,
        on the
        east coast of India.


**Biofuels
      Market**


U.S.
        ethanol production has grown from 1.1 billion gallons per year in 1996 to
        nearly
        6.5 billion gallons per year in 2007, according the Renewable Fuels Association.
 
 The *Energy
        Independence and Security Act of 2007,* signed
        into law by President Bush on December 19, 2007, significantly raised the
        renewable fuel standard (RFS) for the U.S. domestic market. The new RFS requires
        the annual production of 36 billion gallons of alternative fuels by the year
        2022. Of that amount, 21 billion gallons must be from “advanced” biofuels such
        as cellulosic ethanol. Biodiesel consumption in the U.S. grew from 25 mm
        gallons
        per year in 2004 to over 250 mm gallons per year in 2006, a ten-fold increase,
        according to Emerging Markets Online. The new RFS mandates the production
        of 1
        billon gallons per year of biomass based biodiesel by 2012. Similar biofuel
        mandates have emerged in a number of countries across the globe, resulting
        in a
        predictable, long-term market for these products.
 
 Current
        world commodity pricing has created some disruption in the ability to acquire,
        on a cost-effective basis, various feedstocks for the production of both
        corn-based ethanol and biodiesel. Due to a variety of economic factors, we
        anticipate that commodity markets will continue to be unpredictable for the
        foreseeable future.
 
 Emerging
        ethanol technologies should significantly reduce feedstock pricing risk as
        they
        are commercially implemented in the coming months and years. On the biodiesel
        front, vertical integration (owning feedstock assets, for instance) should
        also
        help mitigate risk in the long term.
 
 AE
        Biofuels is responding to ever-changing market conditions by implementing
        strategies that take advantage of these trends.




**Strategy**


Our
        goal
        is to be a leader in the production of renewable fuels to address growing
        renewable and high-octane fuel requirements, and reduce U.S. and worldwide
        dependence on petroleum-based energy sources in an environmentally responsible
        manner.
 
 We
        have
        acquired two ethanol plant sites in the U.S. (Sutton, Nebraska and Danville,
        Illinois) and have options for four other ethanol plant sites in Illinois.
        All
        ethanol plant sites are permitted for an annual capacity of 110 million gallons
        per year. We also own 74% of a biodiesel plant in Kakinada, India with a
        nameplate capacity of 50 million gallons annually, and have identified
        additional potential biodiesel plant sites in India. In addition to the
        biodiesel plant in India, we are currently expanding our facility in Kakinada
        to
        include a refinery that will refine the glycerin byproducts into pharmaceutical
        grade glycerin, which is in strong demand in both India and abroad.
 
 In
        2007,
        we acquired patent-pending enzyme technology that, when commercialized, is
        expected to allow us to differentiate our position in the marketplace by
        utilizing both traditional (corn) and non-food source feedstocks (grasses,
        corn
        stover etc.) By using a variety of feedstocks, we mitigate our exposure to
        fluctuations in the commodity markets. In addition, this new cellulose
        technology is expected to significantly reduce our energy and water requirements
        in the production of ethanol, resulting in improved operating margins. Our
        Butte, Montana cellulosic ethanol demonstration plant is expected to be fully
        operational in the second calendar quarter of 2008.
 
 In
        addition to the production of biodiesel and refinement of glycerin, AE Biofuels
        is currently exploring opportunities to acquire feedstock producing assets,
        as
        well as crushing and oil refining facilities. The Company believes that
        long-term access to a reliable supply of feedstock will reduce its exposure
        to
        unpredictable commodities markets.
 
 We
        also
        expect to implement disciplined risk management practices with respect to
        commodity acquisition and logistics.
 
 We
        believe that by implementing these strategies we can reduce costs and create
        a
        more predictable business, while capturing the benefits of scale to ensure
        long-term competitiveness.


2




**Current
      Biodiesel Projects**


*Universal
        Biofuels Private, Ltd.*
 
 We,
        through our subsidiary, Universal Biofuels Private, Ltd., have constructed
        a
        biodiesel manufacturing facility with a nameplate capacity of 50 million
        gallons
        per annum in Kakinada, State of Andhra Pradesh, Republic of India for the
        production of biodiesel and glycerin byproducts. We are evaluating various
        feedstock agreements in order to fully utilize the facility. We are also
        expanding our facility to add a glycerin refinery that will produce
        pharmaceutical-grade glycerin. The glycerin refinery is expected to be fully
        operational by the third quarter of 2008.
 
 We
        intend
        to market and export biodiesel to U.S. and European customers through marketing
        agreements with various sources in these countries. The pharmaceutical-grade
        glycerin and other glycerin byproducts will be marketed primarily to
        pharmaceutical and cosmetics manufacturers in India and abroad.
 
 *Additional
        Biodiesel Sites*
 
 Our
        goal
        is to develop multiple biodiesel sites with a total capacity of 300 million
        gallons per year. We are currently evaluating additional greenfield sites
        in
        India with the goal of constructing biodiesel production facilities each
        capable
        of producing 50 million gallons of biodiesel per year.


**Current
      Ethanol Projects**


*Cellulosic
      Ethanol Technology*


In
        February 2007, we acquired 51% of Energy Enzymes, Inc., a cellulosic ethanol
        technology company. We will acquire the remaining 49% of Energy Enzymes for
        no
        additional cash consideration upon meeting certain development milestones.
        Energy Enzymes has developed patent-pending ambient temperature enzymes which
        eliminates the up-front “cooking” process that is necessary in traditional
        starch ethanol production. This enzyme technology is designed to reduce
        operating and capital costs for both cellulosic ethanol and starch ethanol
        plants and provides a platform to integrate the two processes.
 
 We
        have
        begun construction of an integrated cellulose and starch ethanol demonstration
        facility in Butte, Montana. The plant will use the Energy Enzyme technology
        to
        optimize process conditions for multiple feedstocks for commercial
        implementation. Non-food ethanol feedstocks used by the facility are expected
        to
        include switch grass, grass seed straw, small grain straw, and corn stalks
        alone
        and in combination with a variety of traditional starch and sugar sources.
        The
        9,000 square foot facility is expected to be fully operational in the second
        calendar quarter of 2008. In addition, we are currently evaluating sites
        for
        large-scale commercial facility construction.
 
 *Proposed
        Ethanol Plant Sites*
 
 Outlined
        below is a brief profile of each of our proposed ethanol plant
        sites:
 
 We
        have
        acquired options to purchase land in various locations in Illinois. The terms
        of
        these options are typically from one to three years and provide that we have
        the
        right to acquire the land for a set price per acre subject to the satisfaction,
        in our sole discretion, of our due diligence. The table below lists the
        locations in which we have acquired options as of the date of this
        Report.




3




***Location***
            
            ***Approximate***
              ***Acreage***
            
            ***Annual
                ethanol******capacity
                (in******millions
                of gallons***
              ***per
                year)***
            
            **Ethanol
                Plant**
              **Permitting****Nebraska**Sutton,
                Clay County*
            
            
            200
            
            
            110
            
            
            Permit
                in Revision**Illinois**Danville,
                Vermilion County**
            
            
            175
            
            
            110
            
            
            Permit
                GrantedGilman,
                Iroquois County
            
            
            204
            
            
            110
            
            
            Permit
                GrantedAllen
                Station, Mason County
            
            
            107
            
            
            110
            
            
            Permit
                GrantedStillman
                Valley, Ogle County
            
            
            200
            
            
            110
            
            
            Permit
                GrantedGridley,
                McLean County
            
            
            107
            
            
            110
            
            
            Permit
                in Process


* *We
        acquired this property in 2006.*
 ***We
        acquired this property in March 2007.*
 
 The
        aggregate purchase price of all land currently under option, if all options
        are
        exercised, is approximately $10.1 million. Currently, we are 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 our analysis
        of these and other factors. We recently filed for air permit extensions for
        all
        of our Illinois sites.


**Benefit
      of Alternative Fuels**


The
        increased use of ethanol and biodiesel will expand U.S. fuel supplies while
        easing an overburdened refining industry. While no new oil refineries have
        been
        built in the U.S. since the 1970s, nearly 100 ethanol production facilities
        and
        95 biodiesel facilities have been built during this time, adding critical
        volume
        to the fuel market.
 
 Other
        factors influencing the outlook for ethanol and biodiesel production are:
        Policy
        and legislative support, strong petroleum prices and outlook, MTBE transition,
        production capacity and import expansion, increasing feedstock yields, and
        technological innovation.
 
 Biodiesel
        currently receives tax credits equal to one penny per percent of biodiesel
        in
        fuel blends made from agricultural products like vegetable oils, and one-half
        penny per percent for recycled oils. Ethanol currently receives a Federal
        excise
        tax exemption of 51 cents per gallon, which has recently been extended to
        year
        2010. In addition, as of the date of this report, 17 states also offer tax
        and
        other financial incentives to encourage ethanol and biodiesel production
        and
        support agricultural markets.
 
 Another
        key factor fueling the growth in ethanol production has been the phase-out
        of
        MTBE use in reformulated gasoline. Historically, MTBE was the primary oxygenate
        used in reformulated gasoline. However, reflecting recent evidence that MTBE
        poses an unacceptable contamination risk to groundwater supplies, many states
        are seeking ways to reduce or eliminate the use of MTBE from the gasoline
        supply. MTBE production volume has begun to shift to fuel ethanol as the
        next
        most competitive high octane oxygenate substitute, primarily as a result
        of
        MTBE’s adverse environmental impacts.
 
 Rising
        petroleum prices have made ethanol and biodiesel relatively more attractive
        economically to refiners and blenders resulting in the substitution of ethanol
        and biodiesel for petroleum based products. Additionally, there are a number
        of
        legislative initiatives that are playing pivotal roles in defining the future
        of
        ethanol and biodiesel.


4




***Manufacturing
      Process***


*Biodiesel*





Biodiesel
      is an ethyl or methyl ester of fatty acids made from edible or non-edible oils
      and animal fatty acids used as a fuel additive to reduce harmful emissions
      and
      particulates and reduce the production of greenhouse gasses. It can be produced
      by refining oil-based feedstock such as palm oil, jatropha (ratanjyot), pongamia
      (karanja), grains, groundnut oil, soybean oil, sunflower oil, crude palm oil,
      rapeseed oil, used vegetable oils, sugarcane juice, molasses, cereals, cellulose
      biomass and from sources such as herbaceous and woody plants, agricultural
      and
      forestry residues and a large portion of municipal solid and industrial
      waste.





*Corn
      Based Ethanol*





Ethanol,
      or ethyl alcohol, is a fuel additive used to reduce harmful emissions and to
      enhance octane. It is produced by the fermentation of carbohydrates found in
      grains and by the extraction and processing of cellulose found in biomass.
      Although ethanol can be produced from a number of different sources, including
      grains such as corn, sorghum and wheat, sugar by-products, rice hulls, cheese
      whey, potato waste, brewery waste, beverage waste, forestry by-products and
      paper wastes, approximately 90% of ethanol in the U.S. today is produced from
      corn. Corn is the primary source for ethanol because corn produces large
      quantities of relatively cheap carbohydrates, which convert into glucose more
      efficiently than other kinds of biomass. However, biomass inputs such as wheat
      grass, switch grass, corn stover, woody biomass, and other non-food inputs
      are
      increasingly being adopted, through various technologies, as alternatives to
      corn.





*Byproducts:
      Biodiesel*





*Glycerin.* The
      crude glycerin that is recovered from the separation phase of the biodiesel
      refining process is further purified. Included in our investment in our Kakinada
      biodiesel plant is $2.5 million to upgrade the biodiesel production facility
      to
      enable us to produce, market and sell pharmaceutical grade glycerin in India,
      where there is currently strong demand. Glycerin is a bonding agent used by
      both
      pharmaceutical and cosmetic companies.





*Byproducts:
      Ethanol*





*Distillers
      Grains* .
      Distiller Grains with Solubles (DGS) are a high protein, high-energy livestock
      and animal feed supplement produced as a by-product of ethanol production.
      DGS
      are considered a “middle protein” with a protein content of around 28 percent.
      Due to differing ages and methods of ethanol plants and production, the nutrient
      content of DGS varies from plant to plant. DGS are marketed in two primary
      forms: Wet (WDGS) and Dry (DDGS). WDGS come directly off the manufacturing
      operations and contain roughly two-thirds moisture (water) by weight. While
      attractive in this form to local livestock feeding operations, it is expensive
      and cumbersome to transport long distances. Most DGS production is dried for
      improved handling and transportability. North American DGS production has
      increased from 300,000 tons in the 1970s to approximately 2.6 million tons
      in
      2000 with an expected increase to 25.0 million tons by 2016 according to the
      Renewable Fuels Association. DDGS growth will continue with the anticipated
      build-out capacity of ethanol.





In
      a dry
      grind ethanol process, a bushel of corn produces between 15 and 17 pounds of
      DDGS, thus a 100 million gallon plant will annually produce approximately
      320,000 tons of DDGS. Successful marketing and disposal of DDGS is important
      to
      a plant’s success. In order to capture a higher netback price for DDGS, the cost
      of transportation of the DDGS product is also important. A plant’s ability to
      sell DDGS to local markets reduces transportation costs, thus increasing the
      netback revenue of the product.





**Federal,
      State and Local Incentives**





There
      are
      currently a number of legislative initiatives that are playing pivotal roles
      in
      the future of ethanol and biodiesel. These current or pending legislative
      initiatives are not the only critical policy issues in ethanol, but they are
      the
      legislation most likely to define the future expansion in ethanol.





*Volumetric
      Ethanol Excise Tax Credit (VEETC)*





Simplifying
      the tax collection system, a user excise tax levied on both gasoline and ethanol
      blended fuels is collected at 18.4 cents per gallon; and all excise taxes levied
      on diesel and biodiesel blended fuels are collected at 24.4 cents per gallon.
      The most important portion of the VEETC for ethanol was the extension of the
      Ethanol Tax Incentive related to federal taxes that are not collected on sales
      of ethanol, which expires after December 31, 2010. The current effective level
      of the incentive is 51 cents per gallon of waived federal taxes for ethanol
      greater than 90 proof.





*Heartland,
      Habitat, Harvest and Horticulture (4-H) Act of 2007*





On
      October 4, 2007, the Senate Finance Committee approved the Heartland, Habitat,
      Harvest and Horticulture (4-H) Act of 2007. This Act extends the federal
      biodiesel tax incentive, which currently expires on December 31, 2008, through
      December 31, 2010 and extends the Biodiesel Small Producer Tax Credit through
      December 31, 2012.




5




*MTBE
      Ban*





As
      mentioned earlier, MTBE was the primary oxygenate used in reformulated gasoline
      blends and marketed in much of the U.S. because it burns cleanly, is a good
      source of octane, is relatively inexpensive and can be blended with gasoline
      at
      the refinery and transported through existing pipelines. However, with the
      emergence of concerns with groundwater contamination, the use of MTBE in
      gasoline is being re-examined and several states have banned the use of MTBE
      in
      gasoline. Due to its high mobility in ground water and its resistance to
      biodegradation, MTBE has been detected in an increasing number of public and
      private water supplies at levels giving rise to concern about possible acute
      and
      chronic health effects. As a result, MTBE production volume has begun to shift
      to fuel ethanol as the next most competitive high octane oxygenate
      substitute.





*Energy
      Policy Act of 2005*





On
      August
      8, 2005, President Bush signed into law the Energy Policy Act of 2005 (the
“2005
      Act”), which contains a comprehensive energy policy, mandating that renewable,
      domestically produced fuels serve a larger role in meeting our nation's energy
      needs. Pursuant to the 2005 Act, it was mandated that the consumption of
      fuel-based ethanol be increased to 7.5 billion gallons by 2012.





*Energy
      Independence and Security Act of 2007*





On
      December 19, 2007, President Bush signed into law the Energy Independence and
      Security Act of 2007 (the “2007 Energy Bill”), which improves vehicle fuel
      economy and reduces U.S. dependence on oil. Key provisions of this energy policy
      are:





·
            The
                2007 Energy Bill puts in place a landmark renewable fuel standard
                (RFS).
                The new RFS requires that 36 billion gallons of alternative fuels
                must be
                sold each year in the U.S. by 2022. Of that amount, 21 billion gallons
                must be from advanced biofuels, such as cellulose ethanol, meeting
                minimum
                greenhouse gas (GHG) reduction
                targets.





·
            The
                RFS is critical to encouraging the research and development, production
                and use of clean-burning, renewable fuels. This legislation will
                provide
                market security for hundreds of small and emerging companies that
                are
                working to diversify the United States fuel
                options.





**·**
            The
                Energy Bill also targets market parity by exempting biofuels from
                fuel
                exclusivity contracts, which are agreements between fuel providers
                and
                fuel retailers which agree to sell only the product supplied by the
                particular fuel supplier. These types of contracts have been used
                to
                dissuade fuel retailers from offering renewable fuels such as ethanol
                and
                biodiesel. These contracts are anti-competitive, inhibit biofuel
                market
                growth and fuel diversification, and will be prohibited by the
                Act.





**·**
            The
                2007 Energy Bill also includes more than $700 million in grants for
                advanced biofuels production and
                infrastructure.





Many
      Midwestern states offer production incentives, grants and tax incentives for
      those companies who build ethanol facilities within their state. We have focused
      our initial efforts on two Midwestern states due to the economic merit of
      building ethanol plants in these regions. In addition to the raw value of these
      locations, these states have been, and continue to be, very supportive of
      ethanol production and the congruent economic development opportunities these
      plants provide to the states, cities and towns in which they are built. The
      Company plans to take advantage of the available state, county and local
      incentives at each specific site location.





**SALES
      AND MARKETING**





The
      overall goal of our ethanol and biodiesel marketing strategy will be to capture
      the highest netback price (net price received after transportation costs) while
      adequately managing price risk and volatility. We plan to coordinate our
      marketing and sales across multiple plants in a given region, which will allow
      us to aggregate product volume and better optimize transportation and logistics
      and thereby giving us greater market and pricing influence.





We
      plan
      to contract with established marketing service providers who bring the required
      depth, resources and relationships to support our marketing objectives.
      Typically, the scope of the marketing service relationship includes management
      of the outbound transportation and logistics, risk management and account
      receivables along with the marketing and sales responsibilities. We are
      currently in the process of reviewing and qualifying candidates.





**COMPETITION**





*Competition
      from other ethanol and biodiesel plants*




6




We
      will
      compete with numerous other ethanol and biodiesel plants that produce the same
      product. The majority of ethanol plants in the U.S. are independent plants
      producing 20-50 million gallons of ethanol per year. Most ethanol plants are
      located in areas of high feedstock and/or livestock concentration. The number
      of
      ethanol plants and the amount of ethanol production has increased significantly
      since the Energy Policy Act of 2005 mandate.





We
      will
      compete on the inbound side for the feedstock and on the outbound side for
      ethanol and DDG markets and biodiesel and glycerin markets. We will seek to
      become a large volume operator with multiple production facilities, which will
      enable us to leverage our scale and geographic diversity to operate at a lower
      unit cost level while still generating the liquidity required, attracting and
      retaining the right resources and funding continuing improvement as well as
      research and development activities.





*Competition
      from import markets*





The
      transition from MTBE, along with the building enthusiasm for ethanol-blended
      fuels, has resulted in what is viewed as a short-term supply challenge. There
      has been an increase in ethanol imports to meet this short-term supply
      gap.





While
      there is a $0.54 per gallon import tariff on ethanol today, some large ethanol
      producers in the U.S. have found ways to by-pass this tariff by importing
      ethanol from countries participating in free trade agreements that offer duty
      free options such as the Caribbean Basis Initiative (CBI).





There
      are
      pending legislative efforts proposing to close this loophole. In the meantime,
      the CBI allows several Central American countries to send ethanol to the U.S
      without incurring the $0.54 per gallon import tariff. Duty-free ethanol from
      CBI
      is currently capped at 7% of the total amount of U.S. ethanol produced from
      the
      previous year, or 60 million gallons, whichever is greater. The CBI countries
      have never come close to meeting this cap. In 1996, CBI countries reached 76.8%
      of the cap for U.S. ethanol imports. Since 1996, imports form CBI countries
      have
      fallen from this high point and have leveled out at lower levels of their
      allotted importation cap. The current production levels can be attributed to
      a
      lack of adequate feedstock supply, but the supplies are now becoming more
      readily available.





*Environmental
      matters*





Our
      plants will be subject to various federal, state and local environmental laws
      and regulations, including those relating to the discharge of materials into
      the
      air, water and ground; the generation, storage, handling, use, transportation
      and disposal of hazardous materials; and the health and safety of our employees.
      These laws, regulations and permits also can require expensive pollution control
      equipment or operational changes to limit actual or potential impacts to the
      environment. A violation of these laws and regulations or permit conditions
      can
      result in substantial fines, natural resource damage, criminal sanctions, permit
      revocations and/or facility shutdowns. We do not anticipate a material adverse
      effect on our business or financial condition as a result of our efforts to
      comply with these requirements. We do not expect to incur material capital
      expenditures for environmental controls in this or in the succeeding fiscal
      year.





There
      is
      a risk of liability for the investigation and cleanup of environmental
      contamination at each of the properties that we own or operate and at off-site
      locations where we may arrange for the disposal of hazardous substances. If
      these substances have been or are disposed of or released at sites that undergo
      investigation and/or remediation by regulatory agencies, we may be responsible
      under CERCLA or other environmental laws for all or part of the costs of
      investigation and/or remediation and for damage to natural resources. We may
      also be subject to related claims by private parties alleging property damage
      and personal injury due to exposure to hazardous or other materials at or from
      these properties. Some of these matters may require us to expend significant
      amounts for investigation and/or cleanup or other costs. We do not currently
      believe that we have any material environmental liabilities relating to
      contamination at or from our facilities or at off-site locations where we have
      transported or arranged for the disposal of hazardous substances.





In
      addition, new laws, new interpretations of existing laws, increased governmental
      enforcement of environmental laws or other developments could require us to
      make
      additional significant expenditures. Continued government and public emphasis
      on
      environmental issues can be expected to result in increased future investments
      for environmental controls at ongoing operations. Present and future
      environmental laws and regulations (and related interpretations) applicable
      to
      operations, more vigorous enforcement policies and discovery of currently
      unknown conditions may require substantial capital and other expenditures.
      Our
      air emissions are subject to the federal Clean Air Act, the federal Clean Air
      Act Amendments of 1990 and similar state and local laws and associated
      regulations. The U.S. EPA has promulgated National Emissions Standards for
      Hazardous Air Pollutants, or NESHAP, under the federal Clean Air Act that could
      apply to facilities that we own or operate if the emissions of hazardous air
      pollutants exceed certain thresholds. If a facility that we operate is
      authorized to emit hazardous air pollutants above the threshold level, then
      we
      will be required to comply with the NESHAP related to our manufacturing process
      and would be required to come into compliance with another NESHAP applicable
      to
      boilers and process heaters. New or expanded facilities would be required to
      comply with both standards upon start-up if they exceed the hazardous air
      pollutant threshold. In addition to costs for achieving and maintaining
      compliance with these laws, more stringent standards may also limit our
      operating flexibility. Because other domestic ethanol manufacturers will have
      similar restrictions, however, we believe that compliance with more stringent
      air emission control or other environmental laws and regulations is not likely
      to materially affect our competitive position.




7




The
      hazards and risks associated with producing and transporting our products,
      such
      as fires, natural disasters, explosions, abnormal pressures, blowouts and
      pipeline ruptures also may result in personal injury claims or damage to
      property and third parties. As protection against operating hazards, we maintain
      insurance coverage against some, but not all, potential losses. Our coverage
      includes physical damage to assets, employer’s liability, comprehensive general
      liability, automobile liability and workers’ compensation. We believe that our
      insurance is adequate and customary for our industry, but losses could occur
      for
      uninsurable or uninsured risks or in amounts in excess of existing insurance
      coverage. We do not currently have pending material claims for damages or
      liability to third parties relating to the hazards or risks of our
      business.





See
“Risk
      Factors— Risks Relating to Ethanol and Biodiesel Industry — Plant sites may have
      unknown environmental problems that could be expensive and time consuming to
      correct, which may delay or halt plant construction and delay our ability to
      generate revenue.”





**EMPLOYEES**





We
      have
      12 full time employees as of March 30, 2008 and additional contracted
      services for management, plant operation, engineering, construction and
      marketing. All of these employees are located in the U.S. None of our employees
      is covered by a collective bargaining agreement. We have had no labor-related
      work stoppages, and we believe we have positive relations with our
      employees.





We
      intend
      to operate the company so that it is scalable, such that increases in production
      capacity will require only an incremental addition of operating resources.





**Item
      1A. Risk Factors**





***We
      have not yet commenced production activities and have limited operating history,
      which makes it difficult to evaluate our financial position and our business
      plan.***





We
      are a
      company in the development stage and have limited business operations.
      Accordingly, there is limited prior operating history by which to evaluate
      the
      likelihood of our success or our ability to exist as a going concern. We may
      never begin or complete construction of an ethanol production facility, our
      biodiesel plant in India, although completed, has not begun production or,
      if we
      do complete the construction of an ethanol facilities or start biodiesel
      production in our India facility, we may not be able to generate sufficient
      revenues to become profitable.





***We
      will need to obtain a significant amount of additional debt and equity capital
      to complete the development and completion of our planned ethanol and biodiesel
      plants, which we may not be able to obtain on acceptable terms or at
      all.***





As
      of
      December 31, 2007, we had approximately $510,000 in cash on hand in our domestic
      entities and $2,845,000 held in offshore subsidiaries including marketable
      securities. Additional funding will be needed to meet ongoing working capital
      needs as well as to meet ongoing obligations with respect to the construction
      of
      our planned ethanol and biodiesel plants. Based on our internal projections,
      we
      currently estimate that the cost to develop and construct our proposed U.S.
      ethanol plants is approximately $240 million per plant and the cost to develop
      and construct our proposed biodiesel plants in India is approximately $30
      million per plant. In addition, once these plants have been constructed, we
      will
      have to fund the start-up operations of these plants until the plants generate
      sufficient cash flow from their operations, if ever. We have acquired four
      sites
      and have options to acquire four additional sites in the U.S. on which we
      propose to construct ethanol and/or biodiesel plants. If all of these sites
      are
      purchased and developed, the development and construction costs for these
      additional facilities are anticipated to exceed $1.5 billion. Additionally,
      we
      may encounter unforeseen costs that could also require us to seek additional
      capital. Further, we have been operating at a loss and expect to increase our
      operating expenses significantly as we expand our operations and begin
      anticipated plant construction.





Although
      we have raised approximately $31.8 million to date through the sales of our
      preferred stock, any future equity or other fundraising may not be successful.
      Our auditors have included an explanatory paragraph in their audit opinion
      with
      respect to our consolidated financial statements for the fiscal years ended
      December 31, 2007 and 2006, which includes a material uncertainty related to
      our
      ability to continue as a going concern.





The
      full
      and timely development and implementation of our business plan and growth
      strategy will require significant additional resources, and we may not be able
      to obtain the funding necessary to implement our growth strategy on acceptable
      terms or at all. An inability to obtain such funding could slow down or prevent
      us from executing on our plan to construct ethanol and biodiesel plants.
      Furthermore, our construction strategy may not produce material revenues even
      if
      successfully funded. We intend to explore a number of options to secure
      alternative sources of capital, including the issuance of senior secured debt,
      subordinated debt, and additional equity, including preferred equity securities
      or other equity securities. We have not yet identified the sources for the
      additional financing we require and we do not have firm commitments from any
      third parties to provide this financing. We might not succeed, therefore, in
      raising additional equity capital or in negotiating and obtaining additional
      and
      acceptable financing when we need it or at all. Our ability to obtain additional
      capital will also depend on market conditions, national and global economies
      and
      other factors beyond our control. We cannot assure you that we will be able
      to
      implement or capitalize on various financing alternatives or otherwise obtain
      required working capital, the need for which is substantial given our operating
      loss history and our business and development plan. The terms of any future
      debt
      or equity funding that we may obtain in the future may be unfavorable to us
      and
      to our shareholders. Our failure to manage our growth effectively could prevent
      us from achieving our goals.




8




***Our
      auditor's opinion expresses substantial doubt about our ability to continue
      as a
      "going concern.”***





Our
      independent auditor’s reports on our December 31, 2007 and 2006 financial
      statements included herein states that recurring losses from operations raise
      substantial doubt about our ability to continue as a going concern. If we are
      unable to develop our business and to generate sufficient revenues, we may
      have
      to discontinue operations or cease to exist, which would be detrimental to
      the
      value of your investment. We can make no assurances that our business operations
      will develop and provide us with significant cash to continue
      operations.





***Our
      auditors identified material weaknesses in our internal control over financial
      reporting as of December 31, 2007 and 2006. Failure to achieve and maintain
      effective internal control over financial reporting could result in our failure
      to accurately report our financial results.***





In
      connection with our audit of our financial statements, our external
      auditors, BDO Seidman, LLP advised us that we had control deficiencies in
      our internal controls over financial reporting as of and for the year ended
      December 31, 2007 and 2006. The control deficiencies 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, accounting for revenue recognition, stockholders equity
      and share-based compensation and acquisitions as well as financial statement
      presentation and disclosures. A "material weakness" is a control deficiency
      or
      combination of control deficiencies that results in more than a remote
      likelihood that a material misstatement in the financial statements or related
      disclosures will not be prevented or detected. During fiscal 2008,
      Management began the remediation process by hiring consultants with
      the necessary accounting knowledge, experience and training to meet the needs
      of
      our organization.   In preparation for the Reverse Merger, we engaged
      a consultant experienced in accounting and financial reporting who assisted
      us
      in preparing our financial statements. We have hired a consultant who is acting
      as our corporate controller with specific responsibilities for external
      financial reporting, internal control, revenue recognition and purchase
      accounting. We expect to incur significant additional costs in the future.
      While
      we expect to complete the process of bringing our internal control documentation
      into compliance with SOX Section 404 as quickly as possible, we cannot at this
      time estimate how long it will take to complete the process or the ultimate
      cost. We expect such costs to be significant.







***We
      envision a period of rapid growth that may impose a significant burden on our
      administrative and operational resources which, if not effectively managed,
      could impair our growth.***





Our
      strategy envisions a period of rapid growth that may impose a significant burden
      on our administrative and operational resources. The growth of our business,
      and
      in particular, the construction of our planned ethanol and biodiesel production
      facilities, will require significant investments of capital and management's
      close attention. In addition to our plans to construct ethanol and biodiesel
      production facilities, we may seek to enter into significant marketing
      agreements, and other similar agreements with companies that currently, or
      expect to, produce ethanol or biodiesel. Our ability to effectively manage
      our
      growth will require us to substantially expand the capabilities of our
      administrative and operational resources and to attract, train, manage and
      retain qualified management, technicians and other personnel; we may be unable
      to do so. In addition, our failure to successfully manage our growth could
      result in our sales not increasing commensurately with capital investments.
      If
      we are unable to successfully manage our growth, we may be unable to achieve
      our
      goals.





***We
      plan to fund a substantial majority of the construction costs of our planned
      ethanol and biodiesel production facilities through the issuance of a
      significant amount of debt, resulting in substantial debt service requirements
      that could harm our financial condition.***





We
      plan
      to fund a substantial portion of the construction costs of our planned ethanol
      and biodiesel production facilities through the issuance of a significant amount
      of debt. As a result, our capital structure is expected to contain a significant
      amount of debt. Debt levels and debt service requirements could have important
      consequences to us, which could reduce the value of your investment,
      including:




9




·
            limiting
                our ability to borrow additional amounts for operating capital or
                other
                purposes and causing us to be able to borrow additional funds only
                on
                unfavorable terms;





·
            reducing
                funds available for operations and distributions because a substantial
                portion of our cash flow will be used to pay interest and principal
                on
                debt;





·
            making
                us vulnerable to increases in prevailing interest
                rates;





·
            placing
                us at a competitive disadvantage because we may be substantially
                more
                leveraged than some of our
                competitors;





·
            subjecting
                all or substantially all of our assets to liens, which means that
                there
                may be no assets left for our shareholders in the event of a liquidation;
                and





·
            limiting
                our ability to adjust to changing market conditions, which could
                increase
                our vulnerability to a downturn in our business as a result of general
                economic conditions.





If
      we are
      unable to pay our debt service obligations, we could be forced to reduce or
      eliminate dividends to our shareholders, if they were to commence, and/or reduce
      or eliminate needed capital expenditures. It is possible that we could be forced
      to sell assets, seek to obtain additional equity capital or refinance or
      restructure all or a portion of our debt on substantially less favorable terms.
      In the event that we were unable to refinance all or a portion of our debt
      or
      raise funds through asset sales, sales of equity or otherwise, we may be forced
      to liquidate.





***If
      we fail to finalize critical agreements, such as design-build agreements,
      ethanol, biodiesel and by-product marketing agreements, and utility supply
      agreements, or the terms of such critical agreements are unfavorable compared
      to
      what we currently anticipate, our projects may fail or be harmed in ways that
      significantly reduce our profitability.***





To
      date,
      we have not signed definitive binding construction agreements with any
      Engineering Procurement Contracts (EPC) firm in the United States to design
      and
      build our planned ethanol or biodiesel plants. Nor have we entered into any
      by-product marketing agreements, feedstock agreements or utility supply
      agreements with respect to either our planned ethanol or biodiesel plants.
      If we
      are unable to enter into these critical agreements or the definitive versions
      of
      those agreements, documents, plans or proposals contain terms or conditions
      that
      vary significantly from the terms and conditions currently expected by us,
      we
      may not be able to operate profitably.





***We
      will be dependent on our engineering procurement and construction (EPC) firm
      and
      our process engineering firms, and their subsidiaries and affiliates for
      expertise in the design, construction and operation of ethanol and biodiesel
      plants and any loss of these relationships could cause delay and added expense,
      placing us at a competitive disadvantage.***





The
      number of engineering and construction firms in the U.S. and India with the
      necessary expertise to design and build ethanol and biodiesel plants and their
      available capacity is limited. We will be dependent on our relationships with
      our EPC firms, and their subsidiaries, affiliates and employees. Any loss of,
      or
      damage to, these relationships, particularly during the construction and
      start-up period for the plant(s), may significantly delay or even prevent us
      from commencing operations and result in the failure of our business. The time
      and expense of locating new consultants and contractors would result in
      unforeseen expenses and delays. Unforeseen expenses and delays may reduce our
      ability to generate revenue and profitability and significantly damage our
      competitive position in the ethanol and biodiesel industry.




10




***We
      may be unable to protect our intellectual property, which could negatively
      affect our ability to compete.***





We
      rely
      on a combination of trademark, trade name, confidentiality agreements, and
      other
      contractual restrictions on disclosure to protect our intellectual property
      rights. We also enter into confidentiality agreements with our employees,
      consultants, and corporate partners, and control access to and distribution
      of
      our confidential information. These measures may not preclude the disclosure
      of
      our confidential or proprietary information. Despite efforts to protect our
      proprietary rights, unauthorized parties may attempt to copy or otherwise obtain
      and use our proprietary information. Monitoring unauthorized use of our
      confidential information is difficult, and we cannot be certain that the steps
      we take to prevent unauthorized use of our confidential information,
      particularly in foreign countries where the laws may not protect proprietary
      rights as fully as in the U.S., will be effective.





On
      February 23, 2006, our wholly owned subsidiary American Ethanol, Inc. registered
      as a corporation in the State of Nevada under the trade name American Ethanol,
      Inc. On March 1, 2006, we filed an “Intent to Use” Trademark application for the
      name American Ethanol with the U.S. Patent and Trademark Office (USPTO). Another
      company in Santa Maria, California registered as a California corporation under
      the name American Ethanol, Inc. in November 2005 and incorporated in the State
      of Delaware under the name of American Ethanol, Inc. This company has also
      filed
“Use” trademark applications with the USPTO for the names American Ethanol and
      America’s Ethanol. These trademark applications predate our trademark
      application and therefore if upheld may prohibit us from using the trademark
      American Ethanol. In addition, their use of the trade name American Ethanol,
      Inc. in California predates our use of the trade name in Nevada. As a result,
      we
      may be obligated to change our subsidiary’s trade name as well, and may be
      subject to damages for trademark and trade name infringement.





***We
      will be required to hire and retain skilled technical and managerial
      personnel.***





Personnel
      qualified to operate and manage ethanol and biodiesel plants are in demand.
      Our
      success depends in large part on our ability to attract, train, motivate and
      retain qualified management and highly-skilled employees, particularly
      managerial, technical, sales, and marketing personnel, technicians, and other
      critical personnel. Any failure to attract and retain the required highly
      trained managerial and technical personnel that are integral to production
      and
      development and technical support teams may have a negative impact on the
      operation of our plants, which would have a negative impact on revenues. There
      can be no assurance that we will be able to attract and retain skilled persons
      and the loss of skilled technical personnel would adversely affect
      us.





***We
      are dependent upon our officers for management and direction and the loss of
      any
      of these persons could adversely affect our operations and
      results.***





We
      are
      dependent upon our officers for implementation of our proposed expansion
      strategy and execution of our business plan. The loss of any of our officers
      could have a material adverse effect upon our results of operations and
      financial position. We do not maintain “key person” life insurance for any of
      our officers. The loss of any of our officers could delay or prevent the
      achievement of our business objectives.





***Increases
      in site or plant construction costs may require us to raise additional capital
      resulting in a dilution of your investment.***  ****





We
      anticipate that EPC firms will construct our proposed plants for a fixed
      contract price, based on the plans and specifications in the anticipated
      design-build agreement. The estimated cost of construction of plants is based
      on
      preliminary discussions, and there is no assurance that the final cost of one
      or
      more of our plants will not be higher. There is no assurance that there will
      not
      be design changes or cost overruns associated with the construction of plants.
      Shortages of steel, concrete or other building materials or labor could affect
      the final cost and final completion date of the project. In addition, specific
      site conditions at any plant site may increase construction costs. For example,
      a proposed site’s proximity or access to natural gas, electricity and water will
      affect construction costs and the greater the distance to natural gas pipelines
      and electric power lines, or if we are required to drill deeper than anticipated
      wells to access the required quantity and quality of water, the construction
      costs of a site could substantially increase. Any significant increase in the
      estimated construction cost of the plant could require us to raise additional
      capital, which would dilute your ownership in the company.





***Construction
      delays could result in devaluation of our shares if the production and sale
      of
      ethanol, biodiesel and their byproducts are similarly
      delayed.***





Construction
      projects often involve delays for a number of reasons including delays in
      obtaining permits, delays due to weather conditions, or other events. In
      addition, an EPC firm’s or any other company’s involvement in the construction
      of a number of other plants while constructing our plant could cause delays
      in
      the construction schedule. Also, any changes in interest rates or the credit
      environment or any changes in political administrations at the federal, state
      or
      local level that result in policy changes towards ethanol, biodiesel or any
      of
      our projects could also cause construction and operation delays. If it takes
      longer to construct any one or more of our plants than is anticipated, our
      ability to generate revenues could be impaired and make it difficult for us
      to
      meet our debt service obligations.




11




***Defects
      in plant construction could result in the delay of ethanol or biodiesel
      production, which could delay our ability to generate revenues and result in
      a
      devaluation of our securities.***  ****





There
      is
      no assurance that defects in materials and/or workmanship in a plant will not
      occur. Under the expected terms of design-build agreements, we expect that
      the
      EPC firm would warrant that the material and equipment furnished to build the
      plant will be new, of good quality, and free from material defects in material
      or workmanship at the time of delivery. Though we expect the design-build
      agreement to require the EPC firm to correct all defects in material or
      workmanship for a period of time after substantial completion of the plant,
      material defects in material or workmanship may still occur. Such defects could
      delay the commencement of operations of the plant, or, if such defects are
      discovered after operations have commenced, could cause us to halt or
      discontinue the plant’s operation. Halting or discontinuing plant operations
      could delay our ability to generate revenues.





***Any
      operational disruption could result in a reduction in sales volumes and could
      cause us to incur substantial losses.***





If
      we are
      able to complete the construction of our plants, our operations may be subject
      to significant interruption if any of our facilities experiences a major
      accident or is damaged by severe weather or other natural disasters. In
      addition, our operations may be subject to labor disruptions and unscheduled
      downtime, or other operational hazards inherent in our industry, such as
      equipment failures, fires, explosions, abnormal pressures, blowouts, pipeline
      ruptures, transportation accidents and natural disasters. Some of these
      operational hazards may cause personal injury or loss of life, severe damage
      to
      or destruction of property and equipment or environmental damage, and may result
      in suspension of operations and the imposition of civil or criminal penalties.
      Our insurance may not cover or be adequate to fully cover the potential
      operational hazards described above.





***We
      may be sued or become a party to litigation, which could require significant
      management time and attention and result in significant legal expenses and
      may
      result in an unfavorable outcome, which could have a material adverse effect
      on
      our business, financial condition, results of operations and cash
      flows.***





We
      may be
      subject to a number of lawsuits from time to time arising in the ordinary course
      of our business. The expense of defending ourselves against such litigation
      may
      be significant. The amount of time to resolve these lawsuits is unpredictable
      and defending ourselves may divert management’s attention from the day-to-day
      operations of our business, which could adversely affect our business, results
      of operations and cash flows. In addition, an unfavorable outcome in such
      litigation could have a material adverse effect on our business, results of
      operations and cash flows.





**Risks
      related to ethanol and biodiesel industry**





***Our
      financial performance will be dependent on prices for feedstock and commodities,
      which are subject to and determined by market forces outside our
      control.***





Our
      results of operations and financial condition will be significantly affected
      by
      the cost and supply of feedstocks such as corn and palm oil, and other
      commodities such as natural gas and electricity. The price of feedstock is
      influenced by weather conditions and other factors affecting crop yields, farmer
      planting decisions and general economic, market and regulatory factors. These
      factors include government policies and subsidies with respect to agriculture
      and international trade, and global and local demand and supply. The
      significance and relative effect of these factors on the price of feedstock
      is
      difficult to predict. Any event that tends to negatively affect the supply
      of
      feedstock, such as adverse weather or crop disease, could increase feedstock
      prices and potentially harm our business. In addition, we may also have
      difficulty, from time to time, in physically sourcing feedstock on economical
      terms due to supply shortages. Such a shortage could require us to suspend
      operations until feedstocks are available at economical terms, which would
      have
      a material adverse effect on our business, results of operations and financial
      position. The price we pay for feedstock at a facility could increase if an
      additional ethanol or biodiesel production facility is built in the same general
      vicinity.





The
      availability and price of feedstock will significantly influence our financial
      performance. We may purchase feedstock in the cash market and hedge price risk
      through futures contracts and options to reduce short-term exposure to price
      fluctuations. There is no assurance that our hedging activities will
      successfully reduce the risk caused by price fluctuation, which may leave it
      vulnerable to high feedstock prices. Hedging activities themselves can result
      in
      costs because price movements in feedstock contracts are highly volatile and
      are
      influenced by many factors that are beyond our control. We may incur such costs
      and they may be significant.





Generally,
      higher feedstock prices will usually produce lower profit margins. This is
      especially true if market conditions do not allow us to pass through increased
      feedstock costs to our customers. There is no assurance that we will be able
      to
      pass through higher feedstock prices because we presently have no operational
      plants or customers. If a period of high feedstock prices were to be sustained
      for some time, such pricing may reduce our ability to generate revenues because
      of the higher cost of operations.




12




We
      will
      rely upon third parties for the supply of natural gas and electricity, which
      is
      consumed in the manufacture of biofuels. The prices for and availability of
      natural gas and electricity are subject to volatile market conditions. These
      market conditions often are affected by factors beyond our control such as
      higher prices resulting from colder than average weather conditions and overall
      economic and political conditions. Significant disruptions in the supply of
      natural gas or electricity could impair our ability to manufacture ethanol
      or
      biodiesel. Furthermore, increases in natural gas or electricity prices or
      changes in natural gas or electricity costs relative to natural gas costs paid
      by competitors may adversely affect our results of operations and financial
      position.





***We
      may depend on others for sales of our products, which may place us at a
      competitive disadvantage and reduce profitability.***  ****





We
      expect
      to hire third-party marketing firms to market some or all of the ethanol and
      biodiesel we plan to produce. We may also hire third-party firms to market
      the
      by products of ethanol and biodiesel production such as distillers’ grains and
      glycerin. As a result, we expect to be dependent on any brokers that we engage.
      There is no assurance that we will be able to enter into contracts with any
      brokers on terms that are favorable to us. If the broker breaches the contract
      or does not have the ability, for financial or other reasons, to market all
      of
      the biofuels we produce, we may not have any readily available means to sell
      our
      products. Our lack of a sales force and reliance on third parties to sell and
      market our products may place us at a competitive disadvantage. Our failure
      to
      sell all of our products may result in less income from sales, reducing our
      revenue stream.





***The
      ethanol and biodiesel production and marketing industry is extremely
      competitive. Many of our competitors have greater financial and other resources
      than we do and one or more of these competitors could use their greater
      resources to gain market share at our expense.***





The
      ethanol and biodiesel production and marketing industry is extremely
      competitive. Many of our significant competitors in the ethanol production
      and
      marketing industry, such as Archer-Daniels-Midland Company and Cargill, have
      substantially greater production, financial, research and development, personnel
      and marketing resources than we do. As a result, our competitors may be able
      to
      compete more aggressively than we could and sustain that competition over a
      longer period of time. Our lack of resources relative to many of our significant
      competitors may cause us to fail to anticipate or respond adequately to new
      developments and other competitive pressures. This failure could reduce our
      competitiveness and cause a decline in our market share, sales and
      profitability.





***Declines
      in the prices of ethanol, distillers’ grains, biodiesel and glycerin will have a
      significant negative impact on our financial
      performance.***  ****





Our
      revenues will be greatly affected by the price at which we can sell our ethanol,
      distillers’ grains, biodiesel and glycerin. These prices can be volatile as a
      result of a number of factors. These factors include the overall supply and
      demand, the price of gasoline, level of government support, and the availability
      and price of competing products. For instance, the price of ethanol tends to
      increase as the price of gasoline increases, and the price of ethanol tends
      to
      decrease as the price of gasoline decreases. Any lowering of gasoline prices
      will likely also lead to lower prices for ethanol, which may decrease our
      ethanol sales and reduce revenues.





The
      prices of ethanol and biodiesel have recently been higher than their 10-year
      average. We expect these prices to be volatile as supply from new and existing
      ethanol and biodiesel plants increases to meet increased demand. Increased
      production of ethanol and biodiesel may lead to lower prices. The increased
      production of ethanol could have other adverse effects. For example, the
      increased production could lead to increased supplies of by-products from the
      production of ethanol, such as distillers’ grains. Those increased supplies
      could outpace demand, which would lead to lower prices for those by-products.
      Also, the increased production of ethanol and biodiesel could result in
      increased demand for the relevant feedstock such as corn and palm oil. This
      could result in higher prices for such feedstock creating lower profits. There
      can be no assurance as to the price of biodiesel, ethanol, distillers’ grains or
      glycerin in the future. Any downward changes in the price of biodiesel, ethanol,
      distillers’ grains and/or glycerin may result in less income, which would
      decrease our profitability.





***Competition
      from the advancement of alternative fuels may lessen the demand for biodiesel
      and ethanol and negatively impact our profitability.***  ****





Alternative
      fuels, gasoline oxygenates and ethanol production methods are continually under
      development. A number of automotive, industrial and power generation
      manufacturers are developing alternative clean power systems using fuel cells
      or
      clean burning gaseous fuels. The emerging fuel cell industry offers a
      technological option to address increasing worldwide energy costs, the long-term
      availability of petroleum reserves and environmental concerns. Fuel cells have
      emerged as a potential alternative to certain existing power sources because
      of
      their higher efficiency, reduced noise and lower emissions. Fuel cell industry
      participants are currently targeting the transportation, stationary power and
      portable power markets in order to decrease fuel costs, lessen dependence on
      crude oil and reduce harmful emissions. If the fuel cell and hydrogen industries
      continue to expand and gain broad acceptance, and hydrogen becomes readily
      available to consumers for motor vehicle use, we may not be able to compete
      effectively. This additional competition could reduce the demand for ethanol
      and
      biodiesel, which would negatively impact our profitability.




13




***As
      domestic ethanol and biodiesel production continues to grow, ethanol and
      biodiesel supply may exceed demand causing prices to
      decline.***  ****





The
      number of ethanol and biodiesel plants being developed and constructed in the
      U.S. continues to increase at a rapid pace. The recent passage of the Energy
      Policy Act of 2005 included a renewable fuels mandate that we expect will
      further increase the number of domestic ethanol and biodiesel production
      facilities. Archer Daniels Midland (ADM) recently announced a plan to add
      approximately 500 million gallons per year of additional ethanol production
      capacity in the U.S. ADM is currently the largest ethanol producer in the U.S.
      and controls a significant portion of the ethanol market. ADM’s plan to produce
      an additional 500 million gallons of ethanol per year will weaken our position
      in the ethanol industry and cause a significant increase in domestic ethanol
      supply. As these plants begin operations, we expect domestic ethanol and
      biodiesel production to significantly increase. If the demand for ethanol and
      biodiesel does not grow at the same pace as increases in supply, we would expect
      the price for ethanol and/or biodiesel to decline. Declining ethanol and/or
      biodiesel prices will result in lower revenues and may reduce or eliminate
      our
      profitability.





***Ethanol
      and biodiesel imported from other countries may be a less expensive alternative
      to ethanol and biodiesel produced by us, which would cause us to lose market
      share and adversely affect profitability.***





Brazil
      is
      currently the world’s largest producer and exporter of ethanol. Ethanol imported
      from Brazil and other countries may be a less expensive alternative to
      domestically produced ethanol if tariffs presently protecting U.S. ethanol
      producers are reduced or eliminated. Competition from ethanol imported from
      Brazil and other countries may affect our ability to sell ethanol
      profitably.





In
      addition, ethanol produced or processed in certain countries in Central America
      and the Caribbean region is eligible for tariff reduction or elimination upon
      importation to the U.S. under a program known as the Caribbean Basin Initiative.
      Large ethanol producers, such as Cargill, have expressed interest in building
      dehydration plants in participating Caribbean Basin countries, such as El
      Salvador, which would convert ethanol into fuel-grade ethanol for shipment
      to
      the U.S. Ethanol imported from Caribbean Basin countries may be a less expensive
      alternative to domestically produced ethanol. Competition from ethanol imported
      from Caribbean Basin countries may affect our ability to sell our ethanol
      profitably.





***Changes
      and advances in ethanol and biodiesel production technology could require us
      to
      incur costs to update our planned ethanol and biodiesel plants or could
      otherwise hinder our ability to compete in the biofuels industry or operate
      profitably.***  ****





Advances
      and changes in ethanol and/or biodiesel production technology may make the
      production technologies installed in any of our plants less desirable or
      obsolete. These advances may also allow competitors to produce biofuels at
      a
      lower cost than we can. If we are unable to adopt or incorporate technological
      advances, our biofuels production methods and processes could be less efficient
      than our competitors, which could cause our plants to become uncompetitive
      or
      completely obsolete. If competitors develop, obtain or license technology that
      is superior to ours or that makes our technology obsolete, we may be required
      to
      incur significant costs to enhance or acquire new technology so that our
      Biofuels production remains competitive. Alternatively, we may be required
      to
      seek third-party licenses, which could also result in significant expenditures.
      We cannot guarantee or assure that third-party licenses will be available or,
      once obtained, will continue to be available on commercially reasonable terms.
      These costs could negatively impact our financial performance by increasing
      our
      operating costs and reducing our net income.





***Plant
      sites may have unknown environmental problems that could be expensive and time
      consuming to correct, which may delay or halt plant construction and delay
      our
      ability to generate revenue.***  ****





We
      may
      encounter hazardous conditions at or near each of our planned facility sites
      that may delay or prevent construction of a particular facility. If we encounter
      a hazardous condition at or near a site, work may be suspended and we may be
      required to correct the condition prior to continuing construction. The presence
      of a hazardous condition would likely delay or prevent construction of a
      particular facility and may require significant expenditure of resources to
      correct the condition. If we encounter any hazardous condition during
      construction, estimated sales and profitability may be adversely
      affected.





**Risks
      related to regulation and governmental action**





***A
      change in government policies favorable to ethanol or biodiesel may cause demand
      for ethanol or biodiesel to decline.***





Growth
      and demand for ethanol and biodiesel may be driven primarily by federal and
      state government policies, such as state laws banning Methyl Tertiary Butyl
      Ether (MTBE) and the national renewable fuels standard. The continuation of
      these policies is uncertain, which means that demand for ethanol or biodiesel
      may decline if these policies change or are discontinued.





***Federal
      tax incentives for ethanol and biodiesel production may be eliminated in the
      future, which could hinder our ability to operate at a profit and adversely
      affect our business.***  ****




14




The
      ethanol and biodiesel industry and our business are assisted by various federal
      tax incentives, including those included in the Energy Policy Act of 2005.
      The
      provision of the Energy Policy Act of 2005 likely to have the greatest impact
      on
      the ethanol industry is the creation of a 7.5 billion-gallon Renewable Fuels
      Standard (RFS). The RFS will begin at 4 billion gallons in 2006, increasing
      to
      7.5 billion gallons by 2012. The RFS helps support a market for ethanol that
      might disappear without this incentive. The elimination or reduction of tax
      incentives to the ethanol industry could increase ethanol prices and thereby
      reduce the market for ethanol, which could reduce our revenues by making it
      more
      costly or difficult for us to produce and sell ethanol. If the federal tax
      incentives are eliminated or sharply curtailed, we believe that a decreased
      demand for ethanol will result, which could result in the failure of our
      business.





Another
      important provision involves an expansion in the definition of who qualifies
      as
      a small ethanol producer. Historically, small ethanol producers were allowed
      a
      10-cents-per-gallon production income tax credit on up to 15 million gallons
      of
      production annually. The size of the plant eligible for the tax credit was
      limited to 30 million gallons. Under the Energy Policy Act of 2005 the size
      limitation on the production capacity for small ethanol producers increases
      from
      30 million to 60 million gallons. This tax credit may foster additional growth
      in ethanol plants of a size similar to our proposed plants and increase
      competition in this particular plant size category.





Similarly,
      there is a $1.00 per gallon tax credit allowed for the production of biodiesel.
      If U.S. federal energy policy changes, or if the tax credit were eliminated,
      it
      could have a negative impact on our biodiesel business. The U.S. Congress is
      currently debating such a proposal, and is expected to vote on revised energy
      policies in the fall of 2007. Any reduction or elimination of current tax
      credits could have a negative impact on us and our business.





***Changes
      in environmental regulations or violations of the regulations could be expensive
      and reduce our ability to become profitable.***  ****





We
      are
      and will continue to be subject to extensive air, water and other environmental
      regulations and will need to obtain a number of environmental permits to
      construct and operate our plants. In addition, it is likely that senior debt
      financing will be contingent on our ability to obtain the various environmental
      permits that we will require. If for any reason, any of these permits are not
      granted, construction costs for the plants may increase, or the plants may
      not
      be constructed at all. Additionally, any changes in environmental laws and
      regulations, both at the federal and state level, could require us to invest
      or
      spend considerable resources in order to comply with future environmental
      regulations. The expense of compliance could be significant enough to reduce
      profits.





***Our
      lack of business diversification could result in the devaluation of our
      securities if we do not generate revenue from our primary products or such
      revenues decrease.***





We
      expect
      that our business will consist of ethanol, biodiesel, distillers’ grains and
      glycerin production and sales. We currently have no other lines of business
      or
      other sources of revenue if we are unable to complete the construction and
      operation of our proposed plants. Our lack of business diversification could
      cause you to lose all or some of your investment if we are unable to generate
      revenues by the production and sales of ethanol, biodiesel, distillers grains
      and glycerin, since we do not have any other lines of business or alternative
      revenue sources.





**Risks
      related to our stock**





***There
      can be no assurance that a liquid public market for our common stock will
      continue to exist.***





Although
      our shares of common stock are eligible for quotation on the OTC Bulletin Board
      electronic over-the-counter trading system, a very limited number of shares
      trade on a regular basis and there may not be a significant market in such
      stock. There can be no assurance that a regular and established market will
      be
      developed and maintained for our common stock. There can also be no assurance
      as
      to the strength or liquidity of any market for our common stock or the prices
      at
      which holders may be able to sell their shares.





***It
      is likely that there will be significant volatility in the trading
      price.***





Market
      prices for our common stock will be influenced by many factors and will be
      subject to significant fluctuations in response to variations in our operating
      results and other factors. Because our business plan is to own and operate
      ethanol and biodiesel plants, factors that could affect our future stock price,
      and create volatility in our stock price, include the price and demand for
      ethanol and biodiesel, the price and availability of oil and gasoline, the
      political situation in the Middle East, U.S. energy policies, federal and state
      regulatory changes that affect the price of ethanol or biodiesel, and the
      existence or discontinuation of legislative incentives for renewable fuels.
      Our
      stock price will also be affected by the trading price of the stock of our
      competitors, investor perceptions of us, interest rates, general economic
      conditions and those specific to the ethanol or biodiesel industry, developments
      with regard to our operations and activities, our future financial condition,
      and changes in our management.




15




***Risks
      relating to low priced stocks.***





Although
      our common stock currently is quoted and traded on the OTC Bulletin Board
      (although there has been only limited trading since May 2006 when trading on
      the
      OTCBB began), the price at which the stock will trade in the future cannot
      currently be estimated. If our common stock trades below $5.00 per share,
      trading in the common stock may be subject to the requirements of certain rules
      promulgated under the Exchange Act of 1934, as amended (the “Exchange Act”),
      which require additional disclosure by broker-dealers in connection with any
      trades involving a stock defined as a penny stock (generally, any non-Nasdaq
      equity security that has a market price share of less than $5.00 per share,
      subject to certain exceptions) and a two business day “cooling off period”
before broker and dealers can effect transactions in penny stocks. For these
      types of transactions, the broker-dealer must make a special suitability
      determination for the purchaser and have received the purchaser’s written
      consent to the transaction prior to the sale. The broker-dealer also must
      disclose the commissions payable to the broker-dealer, current bid and offer
      quotations for the penny stock and, if the broker-dealer is the sole
      market-maker, the broker-dealer must disclose this fact and the broker-dealer’s
      presumed control over the market. These, and the other burdens imposed upon
      broker-dealers by the penny stock requirements, could discourage broker-dealers
      from effecting transactions in our common stock which could severely limit
      the
      market liquidity of our common stock and the ability of holders of our common
      stock to sell it.





***We
      do not intend to pay dividends.***





We
      have
      not paid any cash dividends on any of our securities since inception and we
      do
      not anticipate paying any cash dividends on any of our securities in the
      foreseeable future.





***Members
      of our management hold a substantial amount of our common stock, which will
      enable these shareholders to exercise influence over many matters requiring
      shareholder approval and may have the effect of delaying, preventing or
      deterring a change in control, which could deprive you of an opportunity to
      receive a premium for your securities as part of a sale of the company and
      may
      affect the market price of our stock.***





Cagan
      McAfee Capital Partners (“CMCP”), Eric A. McAfee and Laird Q. Cagan, in the
      aggregate, beneficially own approximately 32.67% of our capital stock on a
      fully
      diluted, as converted basis. Mr. Cagan and Mr. McAfee are equal co-owners and
      Managing Directors of CMCP. In addition, the other members of our Board of
      Directors and management, in the aggregate, beneficially own approximately
      11.3%
      of our common stock. As a result, these shareholders, acting together, will
      be
      able to influence many matters requiring shareholder approval, including the
      election of directors and approval of mergers and other significant corporate
      transactions. See “Security Ownership of Certain Beneficial Owners and
      Management.” The interests of these shareholders may differ from yours and this
      concentration of ownership may have the effect of delaying, preventing or
      deterring a change in control, and could deprive you of an opportunity to
      receive a premium for your securities as part of a sale of the company and
      may
      affect the market price of our securities.





***Future
      sales of our securities, or the perception in the markets that these sales
      may
      occur, could depress our stock price.***





We
      have
      issued and outstanding approximately (i) 84 million shares of common stock;
      (ii)
      6.5 million shares of Series B Preferred Stock; and (iii) options and warrants
      grants of 4.2 million shares of common stock and .75 million shares of Series
      B
      Preferred Stock. These securities will be eligible for public sale only if
      registered under the Securities Act or if the shareholder qualifies for an
      exemption from registration under Rule 144 or Rule 701 under the Securities
      Act,
      or other applicable exemption. Our officers, directors and holders of
      substantially all of our capital stock have not entered into any lock-up
      agreements restricting their ability to sell, transfer or otherwise dispose
      of
      any of their shares. The market price of our capital stock could drop
      significantly if the holders of these shares sell them or are perceived by
      the
      market as intending to sell them. These factors also could make it more
      difficult for us to raise capital or make acquisitions through the issuance
      of
      additional shares of our common stock or other equity securities.





We
      are
      obligated to register the shares of common stock issuable upon conversion of
      the
      Series A Preferred Stock and Series B Preferred Stock for sale to the public
      after the Reverse Merger. We have yet to register these shares. In addition,
      these security holders will have the right to include their securities in any
      public offering we may undertake in the future or demand that we register some
      or all of their shares for sale to the public. The registration or sale of
      any
      of these securities could cause the market price of our securities to drop
      significantly. If the registration statement is not been filed timely, the
      Company will be required to make pro rata payments to each eligible stock
      investor as liquidated damages and not as a penalty, in the amount equal to
      0.5%
      of the aggregate purchase price paid by such investor for the preferred stock
      for each thirty (30) day period or pro rata for any portion thereof following
      the date by which or on which such Registration Statement should have been
      filed
      or effective, as the case may be. Payments shall be in full compensation to
      the
      investors, and shall constitute the investor's exclusive remedy for such events.
      The amounts payable as liquidated damages shall be paid in shares of common
      stock.





16




**Item
      2. Properties**





Corporate
      Office .
      Our
      corporate headquarters is located at 20400 Stevens Creek Blvd., Suite 700,
      Cupertino, California. The Cupertino facility office space consists of 6,134
      rentable square feet. We occupy this facility under a sublease that commenced
      October 8, 2007 and ends on September 30, 2009. The base rent for this facility
      is $15,948.40 per month for the term of the sublease, plus 29.8% of the
      sublessor’s share of operating expenses of the property.





India
      Plant .
      We own
      approximately 32,000 square meters of land in Kakanada, India. The property
      is
      located 7.5 kilometer from the local seaport having connectivity through a
      pipe
      line to the port jetty. The pipe line facilitates the importing of raw materials
      and exporting finished product. On this site, we built a biodiesel plant with
      a
      50 million gallon nameplate capacity, that is currently ready for
      commissioning.





Nebraska
      Office .
      We
      lease approximately 1,000 square feet of office space in Lincoln, Nebraska
      for a
      monthly rental of $1,395. This lease has options to renew, and we have exercised
      the first of these options that extend the rental through June, 2008. The second
      rental option extends the lease through June 2009.





Butte
      Pilot Plant .
      We
      lease approximately 9,000 square feet of industrial building space in Butte,
      Montana  to house our demonstration facility for a monthly rental of $3,750
      until October 15, 2008 when the monthly rental increases to $4,500. This lease
      expires in October 2009. This property includes an option to purchase the land
      and building at the renewal date and at the lease termination date.





Texas
      Office .
      We
      lease approximately 750 square feet of office space in Spring, Texas (near
      Houston) for a monthly rental of $800. This lease is a 12 month least expiring
      in August, 2008.





A
      list of
      domestic properties that we have acquired and property that we have the right
      to
      acquire for planned future plant development is set forth below:





***Location***
            
            ***Ownership***
            
            ***Approximate***
              ***Acreage***
            
            ***Annual
                ethanol***
              ***capacity
                (in***
              ***millions
                of gallons***
              ***per
                year)***
            
            Ethanol
                Plant
              Permitting**Nebraska**Sutton,
                Clay County*
            
            
            Fee
                Simple
            
            
            200
            
            
            110
            
            
            Permit
                in Revision**Illinois**Danville,
                Vermilion County**
            
            
            Fee
                Simple
            
            
            175
            
            
            110
            
            
            Permit
                GrantedGilman,
                Iroquois County
            
            
            Option
            
            
            204
            
            
            110
            
            
            Permit
                GrantedAllen
                Station, Mason County
            
            
            Option
            
            
            107
            
            
            110
            
            
            Permit
                GrantedStillman
                Valley, Ogle County
            
            
            Option
            
            
            200
            
            
            110
            
            
            Permit
                GrantedGridley,
                McLean County
            
            
            Option
            
            
            107
            
            
            110
            
            
            Permit
                  in Process





* *We
      acquired this property in 2006.*


***We
      acquired this property in March 2007.*





We
      believe that our existing facilities are adequate for our current and reasonably
      anticipated future needs.





**Item
      3. 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.




17




On
      July
      18, 2007, Logibio Albany Terminal, LLC filed a complaint against American
      Ethanol, Sutton Ethanol and Eric McAfee, the Company’s chairman, in the United
      States District Court for the Eastern District of Virginia. The complaint sought
      a declaratory judgment and damages for alleged fraud and interference with
      business expectancy. American Ethanol filed a complaint against Logibio and
      Amit
      Bhandari, its owner, in New York. The complaint sought a declaratory judgment
      and damages for alleged fraud and breach of contract. This claim was settled
      in
      October 2007 by mutual agreement of the parties with no payments or costs to
      either party.





**Item
      4. Submission of Matters to a Vote of Security Holders.**





Marwich
      II, Ltd.





A
      special
      meeting of the stockholders of Marwich II, Ltd., a Colorado corporation was
      held
      on November 19, 2007 in Cupertino, California to consider and vote upon the
      following proposals:





(i)
            the
                reincorporation of Marwich II, Ltd. from the State of Colorado to
                the
                State of Nevada by way of a merger with and into the Company’s
                wholly-owned subsidiary, Marwich II, Ltd., a Nevada corporation
                (“Marwich-Nevada”) and the adoption thereby of Marwich-Nevada’s Articles
                of Incorporation to increase the Company’s authorized shares of capital
                stock from 100,000,000 to 465,000,000, with 65,000,000 shares of
                capital
                stock designated as “blank check” preferred stock (the “Reincorporation”);





(ii)
            to
                direct the Marwich-Colorado board of directors to cause Marwich-Colorado,
                as the sole shareholder of Marwich-Nevada, to approve the principal
                terms
                of the Amended and Restated Agreement and Plan of Merger, dated July
                19,
                2007, by and among Marwich-Colorado, Marwich-Nevada, AE Biofuels,
                Inc., a
                Nevada corporation and wholly-owned subsidiary of Marwich-Nevada
                (“Merger
                Sub”) and American Ethanol, Inc. ("American Ethanol"), and the merger
                between the parties (the “Merger”), pursuant to which Merger Sub will be
                merged with and into American Ethanol.





(iii)
            to
                direct the Marwich-Colorado board of directors to cause Marwich-Colorado,
                as the sole shareholder of Marwich-Nevada, to approve an amendment
                to the
                Articles of Incorporation of Marwich-Nevada to change the name of
                the
                company to AE Biofuels, Inc. upon the consummation of the
                Merger.





The
      proposal was approved and the results of the voting are as follows:





Votes
                For
            Votes
                Against
            Abstain3,343,200
            -0-
            -0-








American
      Ethanol, Inc.





A
      special
      meeting of the stockholders of American Ethanol, Inc., a Nevada corporation
      was
      held on November 19, 2007 in Cupertino, California to consider and vote upon
      the
      following proposals:





(i)
            to
                approve the principal terms of the Amended and Restated Agreement
                and Plan
                of Merger, dated July 19, 2007, by and among Marwich II, Ltd., a
                Colorado
                corporation, Marwich II, Ltd., a Nevada corporation, AE Biofuels,
                Inc., a
                Nevada corporation and wholly-owned subsidiary of Marwich-Nevada
                (“Merger
                Sub”) and American Ethanol, Inc. ("American Ethanol"), and the merger
                between the parties (the “Merger”), pursuant to which Merger Sub will be
                merged with and into American Ethanol.





(ii)
            to
                direct the Marwich-Colorado board of directors to cause Marwich-Colorado,
                as the sole shareholder of Marwich-Nevada, to approve an amendment
                to the
                Articles of Incorporation of Marwich-Nevada to change the name of
                the
                company to AE Biofuels, Inc. upon the consummation of the
                Merger.





The
      proposal was approved and the results of the voting are as follows:





Votes
                For
            Votes
                Against
            Abstain76,069,090
            -0-
            583,334




18


**PART
      II**





**Item
      5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities**





**Market
      Information**





Our
      common stock has been traded on the OTC Bulletin Board over-the-counter market
      since December 2007 under the symbol "AEBF" when the ticker symbol was changed
      to reflect the company name change. Prior to December 2007, our stock traded
      on
      the OTC Bulletin Board over-the-counter market since May 2006 under the symbol
      “MWII”. The following table sets forth the high and low bid prices for our
      common stock on the OTC Bulletin Board over-the-counter market from June 1,
      2006
      under both ticker symbols. The source of these quotations are Yahoo.com/Finance.
      The bid prices are inter-dealer prices, without retail markup, markdown or
      commission, and may not reflect actual transactions.


Quarter
                  Ending
              High
                  Bid
              Low
                  BidJune
                  30, 2006
              18.00
              15.50September
                  30, 2006
              39.00
              11.50December
                  31, 2006
              17.50
              10.10March
                  31, 2007
              16.00
              11.75June
                  30, 2007
              14.99
              7.50September
                  30, 2007
              13.50
              10.00December
                  31, 2007
              15.00
              6.10




**Shareholders
      of Record**





As
      of
      December 31, 2007, there were 133 holders of record of our common stock, not
      including holders who hold their shares in street name.





**Dividends**





We
      have
      never paid cash dividends on our preferred or common stock. We intend to keep
      future earnings, if any, to finance the expansion of our business, and we do
      not
      anticipate that any cash dividends will be paid in the foreseeable future.
      Our
      future payment of dividends will depend on our earnings, capital requirements,
      expansion plans, financial condition and other relevant factors. Our retained
      earnings deficit currently limits our ability to pay dividends.





**Securities
      Authorized For Issuance Under Equity Compensation Plans**





2007
      Stock Plan





American
      Ethanol adopted the 2007 Stock Plan on July 17, 2007 and we assumed American
      Ethanol’s 2007 Stock Plan and all of the options issued and outstanding under
      the 2007 Stock Plan upon the consummation of the Reverse Merger on December
      7,
      2007 which will continue to be governed by their existing terms.





Share
      Reserve .
      We have
      reserved 4,000,000 shares of our common stock for issuance under the 2007 Equity
      Incentive Plan. In general, to the extent that awards under the 2007 Stock
      Plan
      are forfeited or lapse without the issuance of shares, those shares will again
      become available for awards. All share numbers described in this summary of
      the
      2007 Stock Plan (including exercise prices for options and stock appreciation
      rights) are automatically adjusted in the event of a stock split, a stock
      dividend, or a reverse stock split.





Administration .
      Either
      the board or any committee of our board of directors may administer the 2007
      Stock Plan. The administrator of the 2007 Stock Plan has the complete discretion
      to make all decisions relating to the plan and outstanding awards.




19




Eligibility .
      Employees, members of our board of directors who are not employees and
      consultants are eligible to participate in our 2007 Stock Plan.





Types
      of
      Award. Our 2007 Stock Plan provides for the following types of awards:





·
            incentive
                and nonstatutory stock options to purchase shares of our common stock;
                and


·
            stock
                purchase rights.





Options
      and Stock Purchase Rights .
      The
      exercise price for options granted under the 2007 Stock Plan may not be less
      than 100% of the fair market value of our common stock on the option grant
      date.
      Optionees may pay the exercise price by using:





·
            cash;


·
            promissory
                note;


·
            other
                shares of the Company’s common stock, provided such shares were acquired
                directly from the Company; have been owned by the Optionee for more
                than
                six months on the date of surrender, and have a Fair Market Value
                on the
                date of surrender equal to the aggregate exercise price of the shares
                as
                to which such Option shall be exercised;


·
            consideration
                received by the Company under a cashless exercise program implemented
                by
                the Company in connection with the Plan; or


·
            any
                combination of the foregoing methods of payment.





Options
      and stock purchase rights vest at the time or times determined by the
      administrator. In most cases, they will vest over a four-year period following
      the date of grant. Options and stock purchase rights also expire at the time
      determined by the administrator, but in no event more than 10 years after they
      are granted. They generally expire earlier if the participant’s service
      terminates earlier.





Change
      in Control .
      In the
      event of a merger of the Company with or into another corporation, or a change
      in control, each outstanding option and stock purchase right shall be assumed
      or
      an equivalent option substituted by the successor corporation. In the event
      that
      the successor corporation in a merger or change in control refuses to assume
      or
      substitute for the option or stock purchase right, then the optionee shall
      fully
      vest in and have the right to exercise the option or stock purchase right as
      to
      all of the Optioned Stock, including shares as to which it would not otherwise
      be vested or exercisable.





A
      change
      in control includes:





·
            a
                merger or consolidation after which our own stockholders own less
                than 50%
                of the surviving corporation or its parent;





·
            a
                sale, transfer or other disposition of all or substantially all of
                our
                assets;





·
            an
                acquisition of 50% or more of our outstanding stock by any person
                or
                group, other than a person related to us (such as a holding company
                owned
                by our stockholders or a trustee or other fiduciary holding securities
                under an employee benefit plan of ours or of our parent or of a subsidiary
                of ours).





Amendments
      or Termination .
      Our
      board of directors may amend or terminate the 2007 Stock Plan at any time.
      If
      our board of directors amends the plan, it does not need to ask for stockholder
      approval of the amendment unless required by applicable law. The 2007 Stock
      Plan
      will continue in effect for 10 years from its adoption date, unless our board
      of
      directors decides to terminate the plan earlier.





The
      following table provides information about our equity compensation plan as
      of
      December 31, 2007:





**Plan
                category**
            
            **(a)**
              **Number of securities**
              **to be issued**
              **upon exercise of**
              **outstanding options,**
              **warrants and rights**
            
            **(b)**
              **Weighted average**
              **exercise price of**
              **outstanding options,**
              **warrants and rights**
            
            **(c)**
              **Number of securities**
              **remaining available**
              **for future issuance**
              **under equity**
              **compensation plans
                (excluding securities
                reflected in column (a))**Equity
                compensation plans approved by security holders(1)
            
            
            -0-Equity
                compensation plans not approved by security holders
            
            
            2,224,000
            
            $
            2.84
            
            
            2,016,000Total
            
            
            2,224,000
            
            $
            2.84
            
            
            2,016,000





(1)
      We
      will seek approval of the 2007 Stock Option Plan through the 2008
      Proxy.




20




**Item
      7. 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, 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. (the “Company”) was incorporated as Marwich II, Ltd. under the
      laws of the State of Colorado on August 16, 1983 to engage in the acquisition
      of
      assets and properties which management believed had good business potential.
      In
      the course of its business the Company acquired a number of real estate and
      promissory note properties.





The
      Company subsequently sold its properties, ceased active business operations
      and
      was administratively dissolved by the Colorado Secretary of State effective
      January 1, 1991. On October 13, 2004, articles of reinstatement were filed
      with
      the Colorado Secretary of State and the Company became current in its reporting
      obligations under the Exchange Act of 1934, as amended.





American
      Ethanol 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, permitting of ethanol plants, constructing new plants, securing
      feedstock sources, developing new plant processes, 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 the Company.
      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 into
      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 our 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 our common stock and 748,074 shares of
      our
      Series B Preferred Stock, respectively. The Company 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 74% interest in the 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 subsidiaries hold
      future plant development assets and include Sutton Ethanol, LLC (“Sutton) and
      Danville Ethanol Inc,. Biofuels Marketing 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
      LLC
      is held as a 51% owned joint venture for the development of next-generation
      cellulosic ethanol. The 49% interest in Energy Enzymes is held by Renewable
      Technology Corporation (“RTC”).




21




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:








**Revenues**





*Revenues* .
      No
      revenues were recorded for the year ended December 31, 2007. We engaged in
      the
      purchase and resale of biodiesel fuel for approximately $740,000 during the
      year
      ended December 31, 2006.





**Expenses**





*Expenses* .
      For the
      period from November 29, 2005 (inception) through December 31, 2007, the Company
      was considered a development stage enterprise under the 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 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 year ended December 31, 2007, this team incurred
      consulting costs of $240,000 for their participation and an additional $17,760
      in related spending for office space, travel and subscriptions.





*General
      and Administrative Expenses*





Principal
      areas of spending for general and administrative spending are in the areas
      of
      employee compensation, travel, professional services, and the impairment of
      an
      asset. The most significant item was a write-off of engineering costs associated
      with the potential development of the Sutton property in the amount of
      approximately $5,114,000 included as miscellaneous expense. This write-off
      was
      offset by a gain of approximately $8,000,000 (see discussion of “other income”
below) during the year ended December 31, 2007.




22




We
        summarize out spending into eight components as follows:


2007
              
              2006%
              
              %Salaries,
                  wages and compensation
              22%
              
              32%Supplies
                  and services
              6%
              
              14%Repair
                  and maintenance
              0%
              
              0%Taxes,
                  insurance, rent and utilities
              2%
              
              2%Professional
                  services
              26%
              
              36%Depreciation
                  and amortization
              0%
              
              0%Travel
                  and entertainment
              5%
              
              10%Miscellaneous
                  expense
              39%
              
              6%Total
              100%
              
              100%




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 year ended December 31, 2007,
        we
        spent approximately $3,451,477 on professional services including a non-cash
        stock compensation charge of approximately $304,612 for stock grants to key
        consultants and advisors. For the year ended December 31, 2006, we spent
        approximately $2,329,000 on professional services of which none was for stock
        based compensation. On an inception to date basis, we spent $5,694,902 on
        professional services, including $304,612 of stock compensation.




The second
      largest component of general and administrative expense is employee
      compensation, including related stock compensation. For the year ended December
      31, 2007, the number of employees grew slightly from 10 employees in January
      2007 to 12 employees in December 2007. Compensation expense grew from
      approximately $2,025,784 for the 12 months ended December 31, 2006 to
      approximately $3,281,932 for the 12 months ended December 31, 2007. The increase
      was principally driven by the non-cash, stock compensation of approximately
      $969,888 during 2007 compared to the stock compensation of $363,460 recorded
      during 2006. On an inception to date basis, we spent $5,307,717 on employee
      compensation, including approximately $1,310,897 of stock compensation.




The
      third
      largest component of general and administrative expense is supplies and
      services, which includes project spending on permits, site inspections and
      option write-offs. This category also includes the miscellaneous expenditures
      for office supplies, computer equipment, networking services, etc. Of the
      approximately $900,591 spent in this category for the 12 months ended December
      31, 2007, costs of expired land options comprises approximately $445,124, costs
      of site inspections comprises approximately $166,487 and costs to obtain permits
      comprises approximately $127,482. This compares to spending of $915,000 for
      the
      year ended December 31, 2006. On an inception to date basis, we have spent
      $1,815,000 on services related to obtaining suitable sites and administrative
      supplies.





During
      2007, the sales and marketing organization was developed through the acquisition
      of Biofuels Marketing. The Company incurred costs for two employees. 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**





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





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





During
      2006, we purchased currency forward contracts to offset the currency risk of
      converting US dollars into India Rupees, prior to the use of these funds for
      the
      construction of our India plant. A gain on foreign currency exchange in the
      amount of $544,774 was recorded in 2007, and a loss on foreign currency exchange
      in the amount of $46,820 was recorded in 2006. As of December 31, 2007, we
      did
      not have any currency forward contracts.





**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 Put. Ltd. to build
      a
      glycerin plant in Kakinada, India. At December 31, 2007 we had construction
      contracts outstanding for $1.85 million that will be funded with cash in our
      India subsidiary.




23




Due
      to
      the risk factors discussed earlier in this document 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 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 December 31, 2007 are only sufficient to cover approximately
      one month of our domestic operating costs. Subsequent
      to December 31, 2007, we borrowed $1,700,000 as project financing to the Energy
      Enzyme Subsidiary from Laird Cagan, a director and related party, in order
      to fund the development of this project and meet current
      obligations.





**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 respective purchase prices to the tangible assets, liabilities
      and intangible asset acquired based upon their estimated fair values. The
      principal asset was an intangible asset consisting of a customer list. All
      of
      the capitalizable costs of this acquisition were allocated to this customer
      list
      as the value of the remaining tangible and intangible assets were negligible.
      This customer list is being amortized over 18 months, its estimated useful
      life.





Our
      long-lived assets are primarily associated with our plant in Kakinada, India.
      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 will 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 December 31, 2007, 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*





*Stock-Based
      Compensation Expense.* Effective
      January 1, 2006, we adopted SFAS No.123, “ *Accounting
      for Stock-Based Compensation* ,”
for
      the recognition of stock-based compensation cost in its statement of operations.
      The fair value of each option award was estimated on the date of the grant
      using
      the Black-Scholes-Merton valuation method. This fair value was amortized as
      compensation expense, on a straight line basis, over the requisite service
      periods of the awards, which was generally the vesting period.




24




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.








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 us, for the shares of common stock underlying
                the
                options given prevailing market conditions.






**Recently
      Issued Accounting Pronouncements**





*Recent
      Accounting Pronouncements*





In
      July
      2006, the FASB issued Financial Interpretation No. 48, “ *Accounting
      for Uncertainty in Income Taxes-an interpretation of FASB Statement
      No. 109* ”
      ("FIN 48"), which is a change in accounting for income taxes. FIN 48
      specifies how tax benefits for uncertain tax positions are to be recognized,
      measured, and derecognized in financial statements; requires certain disclosures
      of uncertain tax matters; specifies how reserves for uncertain tax positions
      should be classified on the balance sheet; and provides transition and
      interim-period guidance, among other provisions. FIN 48 is effective for
      fiscal years beginning after December 15, 2006 and as a result, is
      effective for us on January 1, 2007. Adoption of FIN 48 did not have a
      material impact on our financial postion or results of operations.




25




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. SFAS 157 is effective for fiscal years beginning after
      November 15, 2007 and as a result, is effective for our fiscal year
      beginning January 1, 2008. We are currently evaluating the impact of
      adopting SFAS 157 on our consolidated 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* ”
("SFS
      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. SFAS 159 is effective for fiscal years beginning after
      November 15, 2007. While the Company is currently evaluating the impact of
      adopting SFAS 159, we do not expect that it will have a material effect on
      the
      Company’s financial condition and results of operations.





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. SFAS 141R is effective for fiscal
      years beginning on or after December 15, 2008. The
      effect of adoption of SFAS 141R will have on the Company’s financial statements
      will depend on the nature and size of acquisitions we complete after we adopt
      SFAS 141R.




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 and
      classified as a component of equity. SFAS 160 is effective for fiscal years
      beginning on or after December 15, 2008. The
      effect of adoption of 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 160.




**Item
      8. Financial Statements and Supplementary Data.**





Financial
      Statements are listed in the Index to Consolidated Financial Statements on
      page
      F-0 of this Report.





**Item
      9. Changes in and Disagreements with Accountants on Accounting and Financial
      Disclosure.**





None





**Item
      9A(T). Controls and Procedures.**





(a)
      Management's Annual Report on Internal Control Over Financial Reporting: 
Under the reporting requirements of Exchange Act Rules 13a-15 and 15d-15, this
      Form 10-K report would normally include Management's assessment of the
      effectiveness of the Company's internal control over financial reporting as
      of December 31, 2007.   Management is not including an assessment in
      this report because management believes that such an
      assessment  as of December 31, 2007 is not meaningful and
      may, in fact, be misleading to our investors.




On
      December 7, 2007, the Reverse Merger between Marwich II,
      Ltd. (a publicly traded "shell" corporation that had no operating
      activities) and American Ethanol, Inc. (a private "development stage" company)
      was completed and the Company changed its name to AE Biofuels,
      Inc.  For accounting purposes, the Reverse Merger was treated as a reverse
      acquisition with American Ethanol as the acquirer and Marwich II,
      Ltd.  as the acquired party. As a result, the business and financial
      information included in this report is substantially the business and financial
      information of American Ethanol on a consolidated basis. 
However, the  internal controls over financial
      reporting on which Management would be required to attest are those
      controls that were in place as of December 31, 2007 for Marwich
      II, Ltd., the shell company and, as such, are not sufficient with
      respect to the combined company created as a result of the Reverse Merger. 
As a result, management does not believe that such an assessment is
      meaningful.




(b)
      Report of Independent Registered Public Accounting Firm: This annual report
      does
      not include an attestation report of the Company's registered public accounting
      firm regarding internal control over financial reporting pursuant to Smaller
      Reporting Company rules of the Securities and Exchange Commission.




26




**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.





In
      connection with our audit of our financial statements, our external
      auditors, BDO Seidman, LLP advised us that we had control deficiencies in
      our internal controls over financial reporting as of and for the year ended
      December 31, 2007 and 2006. The control deficiencies 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. A "material weakness"
      is a control deficiency or combination of control deficiencies that results
      in
      more than a remote likelihood that a material misstatement in the financial
      statements or related disclosures will not be prevented or detected. During
      fiscal 2008, Management began the remediation process by hiring
      consultants with the necessary accounting knowledge, experience and training
      to
      meet the needs of our organization.




**Changes
      in Internal Controls**




As
      described above, the Company was previously a publicly traded "shell"
      corporation that had no operating activities, and upon consummation of the
      Reverse Merger, the Company's legacy ICFR and management were entirely
      supplanted by those of American Ethanol, a private “development stage” company
      which was a private company that did not have to perform an assessment of ICFR.
      Accordingly, as a result of the Merger, all of the ICFR during the fiscal
      quarter ended December 31, 2007 that have materially affected, or are reasonably
      likely to materially affect, the Company's ICFR have changed, and the controls,
      processes and systems in place at the Company prior to the Merger should no
      longer be relied upon.




**Item
      9B. Other Information.**





None.





**PART
      III**




Certain
        information required by Part III is incorporated by reference from the Company’s
        definitive Proxy Statement to be filed with the Securities and Exchange
        Commission in connection with the solicitation of proxies for the Company’s 2008
        Annual Meeting of Stockholders (the “Proxy Statement”).


**Item
      10. Directors,
      Executive Officers and Corporate Governance**





The
        information required by this Item with respect to the Company’s directors is
        incorporated by reference to the information in the section entitled “Election
        of Directors” in the Proxy Statement. The information required by this Item with
        respect to the Company’s executive officers is incorporated by reference from
        the Proxy Statement under the heading “Executive Officers.” The information
        required by this Item with respect to disclosure of any known late filing
        or
        failure by an insider to file a report required by Section 16 of the Exchange
        Act is incorporated by reference to the section entitled “Section 16(a)
        Beneficial Ownership Reporting Compliance” in the Proxy Statement. The
        information regarding our corporate governance is incorporated by reference
        to
        the section entitled “Corporate Governance” in the Proxy Statement.
  ***Corporate
          Governance***
  Our
          board
          of directors formed its committees and adopted its corporate governance
          charters
          and policies at the February 21, 2008 meeting. At this meeting, the board
          adopted a Corporate Governance Guideline and formed two committees, a
          governance, compensation and nominating committee and an audit committee.
          Charters were approved for both committees. In addition, a Code of Business
          Conduct and Ethics, and an Insider Trading policy were adopted. Copies
          of these
          policies are available on our corporate web site at www.aebiofuels.com .
          We will
          disclose amendments to, or waivers from, our policies on our corporate
          web site
          at www.aebiofuels.com .
  *Code
          of Business Conduct and Ethics Policy*
  Our
          board
          of directors adopted a code of ethics on February 21, 2008 that applies
          to all
          of our directors, officers and employees, including our principal executive
          officer, principal financial officer, and principal accounting officer.
          The code
          of ethics addresses, among other things, honesty and ethical conduct, conflicts
          of interest, compliance with laws, regulations and policies, including
          disclosure requirements under the federal securities laws, confidentiality,
          trading on inside information, and reporting of violations of the
          code.
  *Insider
          Trading Policy*
  Our
          board
          of directors adopted an insider trading policy on February 21, 2008 that
          applies
          to all of its directors, officers and employees including our principal
          executive officer, principal financial officer, and principal accounting
          officer
          that applies to all trading except the exercise of stock options for cash
          under
          our stock option plan and the purchase of shares under an employee stock
          purchase plan, should we adopt such a plan. The insider trading policy
          addresses
          trading on material nonpublic information, tipping, confidentiality, 10b5-1
          programs, disciplinary actions, trading windows, pre-clearance of trades,
          prohibition against short swing profits and individual responsibilities
          under
          the policy.


27


**Item 11.********
              **Executive
                  Compensation**
  The
        information required by this Item is incorporated by reference from the
        information in the section entitled “Executive Compensation and Other Matters”
in the Proxy Statement.
  **Item 12.********
              **Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters**
  The
        information required by this Item is incorporated by reference from the
        information in the section entitled “Security Ownership of Certain Beneficial
        Owners and Management” and “Board of Directors Meetings and Committees” in the
        Proxy Statement.
  **Item 13.********
              **Certain
                  Relationships and Related Transactions, and Director
                  Independence**
  The
        information required by this Item is incorporated by reference from the
        information in the section entitled “Certain Relationships and Related
        Transactions” in the Proxy Statement.
  **Item 14.********
              **Principal
                  Accountant Fees and Services**
  The
        information required by this Item is incorporated by reference from the
        information in the section entitled “Ratification of Appointment of Independent
        Auditors” in the Proxy Statement.
  28


**Item
      15. Exhibits and Financial Statement Schedules.**





Index
      to
      Exhibits




Exhibit
            
            Description2.1
            
            
            Agreement
                and Plan of Merger by and between Marwich II, Ltd. and American Ethanol,
                Inc. dated as of June 23, 2006 (1)2.2
            
            
            Amended
                and Restated Agreement and Plan of Merger By and Among Marwich II,
                Ltd.,
                aColorado corporation, Marwich II Ltd., a Nevada corporation, AE Biofuels,
                Inc., a Nevada corporation and American Ethanol, Inc., a Nevada
                corporation dated as of July 19, 2007 (2)2.3
            
            
            Agreement
                and Plan of by and between Marwich II, Ltd., a Colorado corporation
                , and
                Marwich II, Ltd., a Nevada corporation dated July 19, 2007 (2)3.1
            
            
            Articles
                of Incorporation (3)3.2
            
            
            Bylaws
                (3)3.3
            
            
            Certificate
                of Designation ofSeries
                B Preferred Stock (3)3.4
            
            
            Certificate
                of Amendment to Articles of Incorporation (3)4.1
            
            
            Specimen
                Common Stock Certificate (3)4.2
            
            
            Specimen
                Series B Preferred Stock Certificate (3)4.3
            
            
            Form
                of Common Stock Warrant (3)4.4
            
            
            Form
                of Series B Preferred Stock Warrant (3)10.1
            
            
            2007
                Stock Plan (3)10.2
            
            
            2007
                Stock Plan form of Stock Option Agreement (3)10.3
            
            
            Amended
                and Restated Registration Rights Agreement, dated February 28, 2007
                (3)10.4
            
            
            Executive
                Chairman Agreement, dated January 30, 2006 with Eric A. McAfee (3)10.5
            
            
            Amended
                Executive Employment Agreement, dated June 1, 2007, with Surendra
                Ajjarapu
                (3)10.6
            
            
            Executive
                Employment Agreement, dated January 12, 2006, with William J. Maender
                (3)10.7
            
            
            Executive
                Employment Agreement, dated May 22, 2007 with Andrew Foster (3)10.8
            
            
            Sublease,
                dated August 20, 2007, by and between Navio Systems, Inc. and American
                Ethanol, Inc. (3)10.9
            
            
            First
                Addendum to Sublease, dated September 6, 2007 by and between Navio
                Systems, Inc. and American Ethanol, Inc. (3)10.11
            
            
            Engagement
                Letter, dated August 7, 2006 by and between American Ethanol, Inc.
                and
                Chadbourn Securities, Inc. (3)14
            
            
            Code
                of Ethics21.1
            
            
            Subsidiaries
                of the Registrant (3)24
            
            
            Power
                of Attorney (see signature page)31.1
            
            
            Rule
                13a-14(a)/15d-14(a) Certification by the Chief Executive Officer31.2
            
            
            Rule
                  13a-14(a)/15d-14(a) Certification by the Chief Financial Officer
                  Certification
                  by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
                  as
                  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                  200232.1
            
            
            Certification
                by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
                as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.32.2
            
            
            Rule
                13a-14(a)/15d-14(a) Certification by the Chief Financial Officer
Certification
                by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
                as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002




footnotes




1.
            Filed
                as an exhibit to the Company’s Current Report on Form 8-K, as filed with
                the Securities and Exchange Commission on June 26,
                2006.2.
            Filed
                as an exhibit to the Company’s Current Report on Form 8-K, as filed with
                the Securities and Exchange Commission on July 20,
                2007.3.
            Filed
                as an exhibit to the Company’s Current Report on Form 8-K, as filed with
                the Securities and Exchange Commission on December 13,
                2007.




29




**AE
      BIOFUELS, INC.**


**(A
      Development Stage Company)**




**Consolidated
      Financial Statements**


**As
      of December 31, 2007 and 2006**








**Index
                To Financial Statements**
            
            **Page
                Number****Report
                of Independent Registered Public Accounting Firm**
            
            
            **F-1****Consolidated
                Financial Statements**Consolidated
                balance sheets
            
            
            **F-2**Consolidated
                statements of operations
            
            
            **F-3**Consolidated
                  statements of cash flows
            
            
            **F-4**Consolidated
                statements stockholders' equity
            
            
            **F-5**Notes
                to consolidated financial statements
            
            
            **F-6
                – F-24**




F-0




**Report
      of Independent Registered Public Accounting Firm**






Board
      of
      Directors and Stockholders


AE
      Biofuels, Inc.


Cupertino,
      California




We
      have
      audited the accompanying consolidated balance sheets of AE Biofuels, Inc. and
      subsidiaries (collectively “the Company”) (a development stage company) as of
      December 31, 2007 and 2006 and the related consolidated statements of operations
      and comprehensive income, stockholders’ equity, and cash flows for years then
      ended and for the period from November 29, 2005 (inception) through December
      31,
      2007. These financial statements are the responsibility of the Company’s
      management. Our responsibility is to express an opinion on these financial
      statements based on our audits.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. The Company is not required to
      have, nor were we engaged to perform, an audit of its internal control over
      financial reporting. Our audits included consideration of internal control
      over
      financial reporting as a basis for designing audit procedures that are
      appropriate in the circumstances, but not for the purpose of expressing an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. An audit also includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements, assessing the accounting principles used and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.




In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of AE Biofuels, Inc. at
      December 31, 2007 and 2006, and the results of its operations and its cash
      flows
      for the years then ended and for the period from November 29, 2005 (inception)
      through December 31, 2007 **,** in
      conformity with accounting principles generally accepted in the United States
      of
      America.





As
      discussed in Note 1 to the consolidated financial statements, effective on
      January 1, 2006 the Company adopted Statement of Financial Accounting
      Standards No. 123(R) *Share-Based
      Payment.*




As
      discussed in Notes 1 and 16 to the consolidated financial statements, on
      January 1, 2007, the Company changed its method of accounting for uncertain
      income tax positions in accordance with the guidance provided in the Financial
      Accounting Standards Board Interpretation No. 48, *Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement
      No. 109* .





The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. As discussed in Note 2 to the consolidated
      financial statements, the Company is a development stage company with a business
      plan to develop, acquire, construct, operate and sell fuel grade ethanol and
      biodiesel from ethanol and biodiesel production facilities primarily located
      in
      the Midwestern United States and India. The Company has experienced operating
      losses and negative cash flows since inception. To date the Company has been
      dependent upon proceeds from the sale of preferred stock and proceeds from
      the
      sale or dissolution of subsidiaries. These factors raise substantial doubt
      about
      the Company’s ability to continue as a going concern. Management’s plans in
      regard to these matters are also described in Note 2. The financial statements
      do not include any adjustments that might result from the outcome of this
      uncertainty.






/s/
      BDO
      Seidman, LLP




San
      Jose,
      CA


March
      31,
      2008




F-1




**AE
      BIOFUELS, INC.**


**(A
      Development Stage Company)**





**CONSOLIDATED
      BALANCE SHEETS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007 AND 2006**




December
                  31, 2007
              
              
              December
                  31, 2006**Assets**Current
                  assets:Cash
                  and cash equivalents
              
              $
              720,402
              
              $
              1,213,134Marketable
                  securities
              
              
              2,635,892
              
              
              -Accounts
                  receivable
              
              
              3,447,039
              
              
              -Accounts
                  receivable - Related party
              
              
              6,127,727
              
              
              -Prepaid
                  expenses
              
              
              58,872
              
              
              348,869Other
                  current assets
              
              
              674,235
              
              
              -Total
                  current assets
              
              
              13,664,167
              
              
              1,562,003Property,
                  plant and equipment, net
              
              
              19,585,087
              
              
              14,727,918Intangible
                  assets
              
              
              233,334Other
                  assets
              
              
              68,488
              
              
              1,073,872**Total
                  assets**
              
              **$**
              **33,551,076**
              
              **$**
              **17,363,793****Liabilities
                  and Stockholders' equity**Current
                  liabilities:Accounts
                  payable and accrued liabilities
              
              $
              9,985,639
              
              $
              528,800Income
                  taxes payable
              
              
              36,750Short
                  term borrowings (related party)
              
              
              -
              
              
              1,250,000Unrealized
                  losses on foreign currency forward contracts
              
              
              -
              
              
              46,820Current
                  portion of long term debt
              
              
              -
              
              
              35,714Total
                  current liabilities
              
              
              10,022,389
              
              
              1,861,334Long
                  term debt
              
              
              -
              
              
              205,357Commitments
                  and Contingencies (Notes 8, 14 and 18)Minority
                  interest in JV
              
              
              -
              
              
              -Stockholders'
                  equity:Series
                  B Preferred Stock, $.001 par value - 40,000,000
              
              
              6,487
              
              
              2,828authorized;
                  6,487,491 and 2,828,996 shares issued andoutstanding,
                  respectively (aggregate liquidationpreference
                  of $19,462,473 and $8,486,988, respectively)Series
                  A Preferred Stock, $.001 par value - 10,000,000
              
              
              -
              
              
              5,000authroized;
                  0 and 4,999,999 shares outstanding, respectively(liquidation
                  preference of $14,999,997)Common
                  Stock - , $.001 par value 400,000,000 authorized
              
              
              84,557
              
              
              74,71084,557,462
                  and 74,710,000 shares issued and outstanding,respectivelyAdditional
                  Paid-in Capital
              
              
              33,707,953
              
              
              21,972,363Deficit
                  Accumulated during the Development Stage
              
              
              (11,995,395
              )
              
              (6,951,198
              )Accumulated
                  Other Comprehensive income
              
              
              1,725,085
              
              
              193,399Total
                  stockholders' equity
              
              
              23,528,687
              
              
              15,297,102**Total
                  liabilities and stockholders' equity**
              
              **$**
              **33,551,076**
              
              **$**
              **17,363,793**




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




F-2




**AE
      BIOFUELS, INC.**


**(A
      Development Stage Company)**





**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007 AND 2006**


**AND
      FROM NOVEMBER 29, 2005 (INCEPTION) TO DATE**




For
                  the year endedDecember
                  31, 2007
              
              December
                  31, 2006
              
              Inception
                  to DateSales
              
              $
              -
              
              $
              744,450
              
              $
              744,450Cost
                  of goods sold
              
              
              -
              
              
              735,000
              
              
              735,000Gross
                  profit
              
              
              -
              
              
              9,450
              
              
              9,450Research
                  and Development
              
              
              257,761
              
              
              -
              
              
              257,761General
                  and Administrative Expenses
              
              
              14,650,742
              
              
              6,163,724
              
              
              20,814,466Operating
                  loss
              
              
              (14,908,503
              )
              
              (6,154,274
              )
              
              (21,062,777
              )Other
                  income / (expense)Interest
                  income net of expense
              
              
              97,749
              
              
              -
              
              
              97,749Other
                  income net of expenses
              
              
              188,316
              
              
              -
              
              
              188,316Gain
                  from sale of subsidiaries
              
              
              9,061,141
              
              
              -
              
              
              9,061,141Gain
                  (loss) on foreign currency exchange
              
              
              544,774
              
              
              (46,820
              )
              
              497,954Income
                  related to 50/50 joint venture
              
              
              50,910
              
              
              132,013
              
              
              182,923Loss
                  before income taxes
              
              
              (4,965,613
              )
              
              (6,069,081
              )
              
              (11,034,694
              )Income
                  taxes
              
              
              (78,584
              )
              
              -
              
              
              (78,584
              )Net
                  loss
              
              $
              (5,044,197
              )
              $
              (6,069,081
              )
              $
              (11,113,278
              )Loss
                  per common shareBasic
                  and Dilutive
              
              
              (0.07
              )
              
              (0.08
              )
              
              (0.15
              )Weighted
                  average shares outstandingBasic
                  and Dilutive
              
              
              75,259,519
              
              
              74,018,141
              
              
              74,638,830




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




F-3




**AE
      BIOFUELS, INC.**


**(A
      Development Stage Company)**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007 AND 2006**


**AND
      FROM NOVEMBER 29, 2005 (INCEPTION) TO DATE**


For
                  the year endedDecember
                  31, 2007
              
              December
                  31, 2006
              
              Inception
                  to Date**Operating
                  activities:**Net
                  loss
              
              $
              (5,044,197
              )
              $
              (6,069,081
              )
              $
              (11,113,278
              )Adjustments
                  to reconcile Net loss toNet
                  cash provided by (used in) operating activities:Stock
                  based compensation
              
              
              1,274,500
              
              
              363,460
              
              
              1,637,960Expired
                  land options
              
              
              445,124
              
              
              -
              
              
              445,124Amortization
                  and Depreciation
              
              
              69,775
              
              
              -
              
              
              69,775Gain
                  on sale of subsidiary
              
              
              (854,695
              )
              
              -
              
              
              (854,695
              )Loss
                  on impairment of assets
              
              
              5,114,236
              
              
              -
              
              
              5,114,236Gain
                  on disolution of joint venture
              
              
              (8,206,446
              )
              
              -
              
              
              (8,206,446
              )Losses
                  on forward currency forward contracts
              
              
              (482,974
              )
              
              46,820
              
              
              (436,154
              )Changes
                  in assets and liabilities:Accounts
                  receivable
              
              
              (8,933,275
              )
              
              -
              
              
              (8,933,275
              )Prepaid
                  expenses
              
              
              288,072
              
              
              (348,869
              )
              
              (60,797
              )Other
                  assets
              
              
              416,767
              
              
              -
              
              
              416,767Accounts
                  payable
              
              
              8,846,132
              
              
              528,800
              
              
              9,374,932Other
                  Liabilities
              
              
              (55,245
              )
              
              -
              
              
              (55,245
              )Income
                  taxes payable
              
              
              34,963
              
              
              -
              
              
              34,963**Net
                  cash used in operation activities**
              
              
              (7,087,263
              )
              
              (5,478,870
              )
              
              (12,566,133
              )**Investing
                  activities:**
              
              
              -
              
              
              -
              
              
              -Purchase
                  of property, plant and equipment
              
              
              (12,117,355
              )
              
              (14,727,918
              )
              
              (26,841,103
              )Purchases
                  of marketable securities
              
              
              (2,459,292
              )
              
              -
              
              
              (2,459,292
              )Cash
                  restricted by letter of credit
              
              
              (500,000
              )
              
              -
              
              
              (500,000
              )Purchase
                  of Marwich II, Ltd., net of losses
              
              
              -
              
              
              (662,406
              )
              
              (662,406
              )Exchange
                  rate gain
              
              
              -
              
              
              (193,399
              )
              
              (193,399
              )Additions
                  to other assets and intangibles
              
              
              
              
              
              (1,073,872
              )
              
              (1,073,872
              )Refund
                  of property expenditures
              
              
              2,775,000
              
              
              -
              
              
              2,775,000Return
                  of assets from disolution of joint venture
              
              
              8,206,446
              
              
              -
              
              
              8,206,446Sale
                  of Wahoo facility
              
              
              2,000,000
              
              
              -
              
              
              2,000,000**Net
                  cash used in investing acivities**
              
              
              (2,095,201
              )
              
              (16,657,595
              )
              
              (18,748,626
              )**Financing
                  activities:**(Payments
                  of) proceeds from short term borrowings
              
              
              (1,250,000
              )
              
              1,250,000
              
              
              -Proceeds
                  from long-term debt
              
              
              -
              
              
              250,000
              
              
              250,000Payments
                  on long-term debt
              
              
              (241,071
              )
              
              (8,929
              )
              
              (250,000
              )Proceeds
                  from settlement
              
              
              200,000
              
              
              -
              
              
              200,000Refund
                  of investment
              
              
              (90,000
              )
              
              -
              
              
              (90,000
              )Proceeds
                  from sale of preferred stock, net of offering costs
              
              
              10,056,154
              
              
              21,854,358
              
              
              31,910,512**Net
                  cash provided by financing activities**
              
              
              8,675,083
              
              
              23,345,429
              
              
              32,020,512Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              14,649
              
              
              -
              
              
              14,649**Net
                  cash increase (decrease) for period**
              
              
              (492,732
              )
              
              1,208,964
              
              
              720,402**Cash
                  and cash equivalents at beginning of period**
              
              
              1,213,134
              
              
              4,170
              
              
              -**Cash
                  and cash equivalents at end of period**
              
              $
              720,402
              
              $
              1,213,134
              
              $
              720,402





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




F-4




**AE
      BIOFUELS, INC.**


**(A
      Development Stage Company)**




**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007 AND 2006**




Membership
                    Units
                
                Series
                    B Preferred Stock (3)
                
                Series
                    A Preferred Stock (1)
                
                Common
                    Stock (2)Units
                
                Dollars
                
                Shares
                
                Dollars
                
                Shares
                
                Dollars
                
                Shares
                
                Dollars
                
                Paid-in
                    Capital in excess of Par
                
                Accumulated
                    Deficit
                
                Accum.
                    Other Comprehensive Income
                
                Total
                  Stockholders
                    Equity**Balance,**
                    November 29, 2005 (date of inception)Sale
                    of members’ units during 2005
                
                
                53,320,000
                
                $
                4,170
                
                
                
                
                $
                -
                
                
                
                
                $
                -
                
                
                
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                4,170-**Balance,**
                    December 31, 2005
                
                
                **53,320,000**
                
                
                **4,170**
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                **4,170**Conversion
                    of units to common shares
                
                
                (53,320,000
                )
                
                (4,170
                )
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                53,320,000
                
                
                53,320
                
                
                (49,150
                )
                
                -
                
                
                -
                
                
                -Sale
                    and grant of founder’s shares to advisor's and strategic
                    partners
                
                
                
                
                
                
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                12,692,000
                
                
                12,692
                
                
                26,038
                
                
                -
                
                
                -
                
                
                38,730Sale
                    of founder's shares to executives
                
                
                
                
                
                
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                4,400,000
                
                
                4,400
                
                
                6,600
                
                
                -
                
                
                -
                
                
                11,000Shares
                    issued for acquisitions
                
                
                
                
                
                
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                3,752,000
                
                
                3,752
                
                
                484,248
                
                
                -
                
                
                -
                
                
                488,000Shares
                    issued to an outside director
                
                
                
                
                
                
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                200,000
                
                
                200
                
                
                25,800
                
                
                -
                
                
                -
                
                
                26,000Shares
                    issued to an employee
                
                
                
                
                
                
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                160,000
                
                
                160
                
                
                20,640
                
                
                -
                
                
                -
                
                
                20,800Sale
                    of Preferred Series A convertible stock net of issuance
                    expenses
                
                
                
                
                
                
                
                
                -
                
                
                -
                
                
                4,999,999
                
                
                5,000
                
                
                -
                
                
                -
                
                
                14,110,719
                
                
                -
                
                
                -
                
                
                14,115,719Loss
                    on purchase of subsidiaries
                
                
                
                
                
                
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (882,117
                )
                
                -
                
                
                (882,117
                )Shares
                    issued to a director and advisors
                
                
                
                
                
                
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                186,000
                
                
                186
                
                
                278,814
                
                
                -
                
                
                -
                
                
                279,000Sale
                    of Preferred Series B convertible stock net of issuance
                    expenses
                
                
                
                
                
                
                
                
                2,828,996
                
                
                2,828
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                7,693,401
                
                
                -
                
                
                -
                
                
                7,696,229Compensation
                    expense related to options issued to employees
                
                
                
                
                
                
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                37,659
                
                
                -
                
                
                -
                
                
                37,659Purchase
                    of shares in Marwich II, Ltd. net of acquired losses for current
                    year
                
                
                
                
                
                
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (662,406
                )
                
                -
                
                
                -
                
                
                (662,406
                )Net
                    loss from start up operations
                
                
                
                
                
                
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (6,069,081
                )
                
                -
                
                
                (6,069,081
                )Accumulated
                    other comprehensive income
                
                
                
                
                
                
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                193,399
                
                
                193,399-**Balance
                    at December 31, 2006**
                
                
                **-**
                
                **$**
                **-**
                
                
                **2,828,996**
                
                **$**
                **2,828**
                
                
                **4,999,999**
                
                **$**
                **5,000**
                
                
                **74,710,000**
                
                **$**
                **74,710**
                
                **$**
                **21,972,363**
                
                **$**
                **(6,951,198**
                **)**
                **$**
                **193,399**
                
                **$**
                **15,297,102**Sale
                    of Series B preferred net
                    of offering costs $1,009,331
                
                
                
                
                
                
                
                
                3,688,495
                
                
                3,689
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                10,052,465
                
                
                
                
                
                
                
                
                10,056,154Forfeited
                    shares of former employee
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (800,000
                )
                
                (800
                )
                
                800
                
                
                
                
                
                
                
                
                -Addition
                    Paid in Capital from settlement
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                200,000
                
                
                
                
                
                
                
                
                200,000Shares
                    issued to consultant as compensation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                5,000
                
                
                5
                
                
                14,995
                
                
                
                
                
                
                
                
                15,000Stock
                    based compensation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,259,500
                
                
                
                
                
                
                
                
                1,259,500Refund
                    of Investment
                
                
                
                
                
                
                
                
                (30,000
                )
                
                (30
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                (89,970
                )
                
                
                
                
                
                
                
                (90,000
                )Shares
                    issued in connection with business combination
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                200,000
                
                
                200
                
                
                299,800
                
                
                
                
                
                
                
                
                300,000Fireign
                    currency translation adjustment
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,531,686
                
                
                1,531,686Net
                    loss from start up operations
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (5,044,197
                )
                
                
                
                
                (5,044,197
                )Conversion
                    of Series A Shareholders
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (4,999,999
                )
                
                (5,000
                )
                
                9,999,998
                
                
                10,000
                
                
                (5,000
                )
                
                
                
                
                
                
                
                -Merger
                    of shares formerly Marwich II
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                442,464
                
                
                442
                
                
                3,000
                
                
                
                
                
                
                
                
                3,442**Balance
                    at December 31, 2007**
                
                
                
                
                
                
                
                
                **6,487,491**
                
                **$**
                **6,487**
                
                
                **-**
                
                **$**
                **-**
                
                
                **84,557,462**
                
                **$**
                **84,557**
                
                
                **33,707,953**
                
                **$**
                **(11,995,395**
                **)**
                **$**
                **1,725,085**
                
                **$**
                **23,528,687**




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




F-5


NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2007 AND 2006


**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, 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 LLC, a Delaware limited liability
      company, 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 fund raising
      through the sale of stock, purchased or acquired options to purchase land for
      development of ethanol plants in the United States, completed construction
      of a
      biodiesel manufacturing and glycerin refining facility in Kakinada, India
      through a joint venture between International Biodiesel, Inc., its wholly owned
      subsidiary Universal Biofuels Private, Ltd., a Mauritius corporation and
      Acalmar, an India corporation and started ground work for an ethanol facility
      in
      Sutton, Nebraska as well as started construction of a glycerin refining
      operation.





AE
      Biofuels, Inc. (the “Company”) was incorporated as Marwich II, Ltd. under the
      laws of the State of Colorado on August 16, 1983 to engage in the acquisition
      of
      assets and properties which management believed had good business potential.
      In
      the course of its business the Company acquired a number of real estate and
      promissory note properties.




The
      Company subsequently sold its properties, ceased active business operations
      and
      was administratively dissolved by the Colorado Secretary of State effective
      January 1, 1991. On October 13, 2004, articles of reinstatement were filed
      with
      the Colorado Secretary of State and the Company became current in its reporting
      obligations under the Exchange Act of 1934, as amended.





American
      Ethanol 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, the Company acquired 88.3% of the outstanding common stock of Marwich
      II, Ltd. (“Marwich”) pursuant to a stock purchase agreement between the Company
      and the principal shareholders of Marwich. Marwich was a shell company, whose
      shares are traded on the OTC Bulletin Board and had no current operations.
      On
      December 7, 2007, American Ethanol merged with and into Marwich and (i) each
      issued and outstanding share of American Common Stock (including Common Stock
      issued upon conversion of American 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
      assumed and converted into a warrant and/or option exercisable for common stock
      of Marwich. Marwich then changed its name to AE Biofuels, Inc.





*Principles
      of Consolidation* .
      The
      consolidated financial statements include the accounts of the Company and its
      subsidiaries. All material inter-company accounts and transactions are
      eliminated in consolidation.




*Use
      of Estimates* .
      The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America 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 and revenues and expenses during the reporting period.
      Actual results could different from those estimates. The Company’s most
      significant estimate relates to impairment of long-lived assets and the
      valuation of equity instruments such as options and warrants.





***Fair
      Value of Financial Instruments.***  The
      carrying amounts of cash equivalents, marketable securities, accounts receivable
      and accounts payable approximate their respective fair values due to their
      short-term maturities.





***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.




F-6




NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2007 AND 2006


**1.**  **Nature
      of Activities and Summary of Significant Accounting Policies
      (contd.)**





*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 assets useful
      life.





*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.





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.





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





*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.




F-7




NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2007 AND 2006


*Net
      Loss Per Share.* ****** Basic
      loss per share includes no dilution and 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 potential dilution of common stock equivalents
      such
      as options and warrants, to the extent the impact is dilutive. As the Company
      incurred net losses for the years ended December 31, 2007, 2006 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 2007, 2006 and on a cumulative basis
      was 3,505,491, and 2,953,204 and 6,765,118, respectively.





*Comprehensive
      Loss.* 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.




*Translation
      of Foreign Currencies.* ****** 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.





·
            *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.




F-8




NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2007 AND 2006


**1.**  **Nature
      of Activities and Summary of Significant Accounting Policies
      (contd.)**





*Recent
      Accounting Pronouncements*





In
      July
      2006, the FASB issued Financial Interpretation No. 48, “ *Accounting
      for Uncertainty in Income Taxes-an interpretation of FASB Statement
      No. 109* ”
      (“FIN 48”), which is a change in accounting for income taxes. FIN 48
      specifies how tax benefits for uncertain tax positions are to be recognized,
      measured, and derecognized in financial statements; requires certain disclosures
      of uncertain tax matters; specifies how reserves for uncertain tax positions
      should be classified in the balance sheet; and provides transition and
      interim-period guidance, among other provisions. FIN 48 is effective for
      fiscal years beginning after December 15, 2006. Adoption of Fin 48 did not
      have a material impact on our financial position or results of
      operations.





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. SFAS 157 is effective for fiscal years beginning after
      November 15, 2007 and as a result, is effective for our fiscal year
      beginning January 1, 2008. We are currently evaluating the impact of
      adopting SFAS 157 on our consolidated 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* ”
      ("SFAS19") . 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. SFAS 159 is effective for fiscal years beginning after
      November 15, 2007. While the Company is currently evaluating the impact of
      adopting SFAS 159, we do not expect that it will have a material effect on
      the
      Company’s financial condition or results of operations.





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. SFAS 141R is effective for fiscal
      years beginning on or after December 15, 2008. The
      effect of adoption of SFAS 141R will have on the Company’s financial statements
      will depend on the nature and size of acquisitions we complete after we adopt
      SFAS 141R.




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 160 is effective
      for fiscal years beginning on or after December 15, 2008. The
      effect of adoption of 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 160.





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





The
      accompanying financial statements have been prepared on the 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 December 31, 2007. 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 December 31, 2007. Management plans to begin
      operations of its biodiesel facility and glycerin refinery 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 the ethanol facilities noted above.





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 enough
      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 public stock offerings and debt
      financings.




F-9




NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2007 AND 2006


**3.**  **Marketable
      Securities.**





The
      Company’s marketable securities consist of fixed interest bank time deposits
      which generally have maturities to the Company of 120 days and as a result
      could
      not be classified as cash and cash equivalents and accordingly have been
      classified as available for sale and carried at fair value. At December 31,
      2007, there were only nominal differences between cost and fair value of these
      instruments and as a result no fair value changes have been recorded to
      accumulated other comprehensive income. During 2007 there were no realized
      gains
      or losses on these securities.





**4.**  **Property,
      Plant and Equipment.**





Property,
      plant and equipment consist of the following:





**December
                31,**
              **2007**
            
            **December
                31,**
              **2006**Land
            
            $
            3,734,623
            
            $
            1,956,995Furniture
                and fixtures
            
            
            52,747
            
            
            -0-Construction
                in progress
            
            
            15,800,752
            
            
            12,770,923Total
                gross property, plant & equipment
            
            
            19,588,122
            
            
            14,727,918Less
                accumulated depreciation
            
            
            (3,035
            )
            
            -0-Total
                net property, plant & equipment
            
            $
            19,585,087
            
            $
            14,727,918





For
      the
      year ended December 31, 2007, the Company recorded $3,035 in depreciation.
      Since
      the Company did not have any equipment in service during 2006, no depreciation
      expense was recorded for that period. The company determined that certain
      construction in progress costs associated with the repurchase of assets from
      the
      Sutton Joint Venture were impaired and an amount of $5,114,236 was recognized
      as
      a loss on impairment, during 2007.





In
      January and February 2007 the Company canceled orders for equipment and services
      included in property, plant and equipment at December 31, 2006 and received
      a
      refund of previously advanced funds of $2,775,000, which was been credited
      to
      such account.





As
      of
      December 31, 2007, the Company had paid approximately $15.3 million of the
      Company’s $15.5 million funding commitment to its subsidiary, International
      Biofuels, inc. for plant construction costs.




F-10




NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2007 AND 2006




**5.**  **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.





**December
                31,**
              **2007**
            
            **December
                31,**
              **2006**CurrentLetter
                of Credit securing material purchases
            
            $
            500,000
            
            $
            -0-Land
                options
            
            
            164,536
            
            
            -0-Interest
                receivable
            
            
            9,699
            
            
            -0-$
            674,235
            
            $
            -0-Long
                TermLand
                options
            
            $
            -0-
            
            $
            515,500Domain
                names
            
            
            46,098
            
            
            28,000Deposits
            
            
            22,390
            
            
            -0-Contract
                lease prepayments
            
            
            -0-
            
            
            530,372$
            68,488
            
            $
            1,073,872





Land
      options in the amount of $445,125 were expensed during the year ended December
      31, 2007, as they either expired or were considered impared.





**6.**  **Intangible
      Assets.**





Intangible
      assets consist of purchased customer lists (acquired in 2007 in connection
      with
      the Biofuels Marketing Acquisition discussed in Note 12), which will be
      amortized over an estimated useful life of 18 months. As of December 31, 2007,
      intangible assets had a cost basis of $233,334. For the year ended December
      31,
      2007, the Company recorded $66,666 in amortization.




**7.**  **Debt.**




On
      November 16, 2006, the Company entered into a short-term loan agreement with
      one
      of its directors pursuant to which the Company borrowed $1,000,000 at 10%
      interest per annum for a period of nine months or until funds were raised
      through a private placement sufficient to repay the loan amount. On December
      28,
      2006 the Company borrowed an additional $250,000 under the same terms and
      conditions from the same director. The note was repaid in full on August 16,
      2007.




F-11




NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2007 AND 2006




**8.**  **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 Butte, Montana facility contains
      provisions for purchase of the land and building underlying the lease at the
      end
      of each lease year. Expense for operating leases totaled $101,331 in 2007 and
      $48,874 in 2006.





Future
      minimum operating lease payments as of December 31, 2007, are:





**Rental********Payments**2008
            
            $
            257,8502009
            
            
            188,536Thereafter
            
            
            -0-$
            446,386





**9.**  **Stockholders
      Equity.**





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





*Convertible
      Preferred Stock*





The
      following is a summary of the authorized, issued and outstanding convertible
      preferred stock:




**Shares
                Issued and Outstanding****Authorized**
            
            
            **December
                31,****Shares**
            
            
            **2007**
            
            
            **2006**Series A
            
            
            5,000,000
            
            
            -
            
            
            4,999,999Series B
            
            
            40,000,000
            
            
            6,487,491
            
            
            2,828,996Undesignated
            
            
            20,000,000
            
            
            —
            
            
            —65,000,000
            
            
            6,487,491
            
            
            7,828,995





Our
      Articles of Incorporation authorize our board to issue up to 65,000,000 shares
      of preferred stock, $0.001 par value, in one or more classes or series within
      a
      class upon authority of the board without further stockholder approval.





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 of Series B preferred
      stock. 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.




F-12




NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2007 AND 2006


*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.





*Conversion* *.* Holders
      of Series B Preferred Stock have the right, at their option at any time, to
      convert any shares into common stock. Each share of preferred stock will convert
      into one share of common stock, at the current 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 the Registration Statement covering the resale of the shares of common
      stock is issuable, then all outstanding Series B Preferred Stock shall be
      automatically converted into common stock at the then effective conversion
      rate.





*Registration
      Rights Agreement liquidating damages for certain common and Series B Preferred
      Stock holder.* 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) registered under the Securities
      Act
      within but no later than 30 days after the Reverse Merger Closing date, December
      7, 2007, pursuant to the terms and subject to the conditions set forth in a
      Registration Rights Agreement entered into among the Company and such holders.
      Registration of these shares under the Securities Act would result in these
      shares becoming freely tradable without restriction under the Securities Act.





To
      date,
      the registration statement has not been filed, therefore the Company is required
      to make pro rata payments to each eligible stock investor as liquidated damages
      and not as a penalty, in the amount equal to 0.5% of the aggregate purchase
      price paid by such investor for the preferred stock for each thirty (30) day
      period or pro rata for any portion thereof following the date by which or on
      which such Registration Statement should have been filed or effective, as the
      case may be. Payments shall be in full compensation to the investors, and shall
      constitute the investor's exclusive remedy for such events. The amounts payable
      as liquidated damages shall be paid in shares of common stock.





*Series
      A Conversion.*





In
      December 2007, in connection with the Reverse Merger, American Ethanol converted
      all Series A Preferred Stock into common stock of AE Biofuels, Inc. at a
      two-for-one ratio.








*Common
      Stock*





During
      2007, the Company reacquired 800,000 shares from its former CEO (under the
      terms
      of a repurchase agreement) upon his voluntary termination.




F-13




NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2007 AND 2006


The
      Company issued 200,000 shares in fiscal 2007, for the purchase of Biofuels
      Marketing, Inc. As discussed in Note 11, 100,000 of these shares are subject
      to
      vesting based on the continued employment of one key employee.





**10.**  **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 Securities and
      Exchange Commission. 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 warrants for 2007 and 2006 is as
      follows:




*Number
                of*
              *Warrants*
            
            *Weighted-*
              *Average*
              *Exercise*
              *Price*
            
            *Warrants*
              *Exercisable*
            
            Remaining
              Term
              *(years)*Outstanding,
                December 31, 2005
            
            
            -
            
            
            -
            
            
            -Granted
            
            
            1,020,653
            
            $
            1.82Exercised
            
            
            -
            
            
            -Outstanding,
                December 31, 2006
            
            
            1,020,653
            
            
            1.82
            
            
            1,020,000
            
            
            6.7Granted
            
            
            527,421
            
            
            3.00Exercised
            
            
            -
            
            
            -Outstanding,
                December 31, 2007
            
            
            1,548,074
            
            $
            3.00
            
            
            1,548,074
            
            
            6.1





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 from the Series A and B financing.





*Warrants*





In
      July
      2007, we issued 1,200,000 revocable warrants to Thames Advisory, Ltd. and paid
      $200,000 in consulting fees in exchange for potentially raising a $200 million
      debt facility. The warrants are earned on the percentage of the offering that
      is
      successfully raised before June 30, 2008. To date no warrants have been earned
      and none are exercisable since no fundraising has occurred.





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.




F-14




NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2007 AND 2006




**11.
      Stock- Based Compensation**





*Common
      Stock Reserved for Issuance*





AE
      Biofuels authorized the issuance of 4,000,000 shares under the 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. 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 :




**Options
                Outstanding**Shares
                Available
            
            
            **Number**
            
            
            **Weighted-Average**For
                Grant
            
            
            **of
                Shares**
            
            
            **Exercise
                Price**Balance
                as of December 31, 2006
            
            
            -
            
            
            -
            
            
            -Authorized
                (2007 plan inception)
            
            
            4,000,000Granted
            
            
            (1,984,000
            )
            
            1,984,000
            
            $
            3.00Exercised
            
            
            -
            
            
            -
            
            
            -Canceled
            
            
            -
            
            
            -
            
            
            -Balance
                as of December 31, 2007
            
            
            2,016,000
            
            
            1,984,000
            
            $
            3.00





The
      weighted average remaining contractual term is 9.78 years at December 31, 2007.
      The aggregate intrinsic value of the shares outstanding at December 31, 2007
      is
      $18,848,000.  The
      aggregate intrinsic value represents the total pretax intrinsic value, based
      on
      the excess of the Company’s closing stock price of $12.50 as of
      December 31, 2007 over the options 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
        December 31, 2007 the weighted average remaining contractual term was 4.9
        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 EIFT, 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 December 31, 2007 and 2006 were 817,000 and 12,500,
      with weighted average exercise prices of $2.85 and $1.50,
      respectively.





*Non-Plan
      Stock Options*





In
      Fiscal
      2006, 290,000 stock options were issued outside of any stock option plan, of
      which 50,000 were forfeited during 2007. For the remaining 240,000 options
      outstanding as of December 31, 2007, the weighted average remaining contractual
      term is 8.14 years. The grant date fair value of this award is
      $.25.




F-15




NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2007 AND 2006




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





The
      weighted-average fair value calculations for options granted within the period
      are based on the following weighted average assumptions:




**Fiscal
                Year Ended**
              **December 31,****2007**
            
            **2006**Risk-free
                interest rate
            
            
            3.01
                to 5.00
            %
            
            5.00
            %Expected
                volatility
            
            
            61.9
            %
            
            53.6
            %Expected
                life (years)
            
            
            3.31
            
            
            3.75Weighted
                average fair value per share of common stock
            
            $
            0.47
            
            $
            0.13





The
      Company incurred stock compensation expense of $1,274,500 and $363,460 in fiscal
      2007 and 2006, respectively, for options granted to our general &
administrative employee and consultants. Therefore all stock option expense
      was
      classified as general and administrative expense. Stock compensation expenses
      to
      consultants for 2007 and 2006 was $296,071 and 0 respectively.





As
      of
      December 31, 2007 and 2006, there was $696,048 and $60,058, respectively,
      of total unrecognized compensation expenses under FAS 123R, net of estimated
      forfeitures, related to stock options that the Company will amortize over the
      next four fiscal years.


In
        January 2006, the Company issued employees 4,400,000 shares of common stock
        at
        $.0025 per share in the form of restricted stock awards in connection with
        employment agreements under restricted unit purchase agreements. These shares
        were issued as an incentive to retain key employees and officers and will
        vest
        over 3 years.
 
 The
        following table summarizes the Company’s repurchase rights under these
        agreements:
 
 Number
                  of Shares
              
              Weighted
                  Average Grant Date Fair ValueRepurchasable
                  shares of January 1, 2006
              
              
              4,400,000
              
              
              .0025Vested
              
              
              (1,550,000
              )
              
              (.0025
              )Forfeited
              
              
              –
              
              
              –Repurchasable
                  shares of December 31, 2006
              
              
              2,850,000
              
              
              .0025Vested
              
              
              (950,000
              )
              
              (.0025
              )Forfeited
              
              
              (800,000
              )
              
              (.0025
              )Repurchasable
                  shares of December 31, 2007
              
              
              1,100,000
              
              
              .0025





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





*Private
      Company Acquisitions* .
      On
      February 1, 2006 American Ethanol, Inc. acquired all of the membership interests
      in three development stage companies: Wahoo Ethanol LLC, Sutton Ethanol LLC
      and
      Illinois Valley Ethanol LLC in exchange for an aggregate of 3,752,000 shares
      valued at $488,000 of American common stock. The transaction was accounted
      for
      as a dividend to stockholders. Wahoo and Sutton were 100% owned by two
      individuals who also owned 25.5% of the original founder’s common stock of
      American. As a part of the purchase of Wahoo and Sutton, American paid these
      two
      individuals $400,000 which represents their capital contributions to these
      companies. The founders of these two companies subsequently became the President
      and Executive Vice President of American. Subsequent to the purchase of Wahoo,
      American settled a preacquisition outstanding claim by one of Wahoo’s former
      advisors for $133,000. This settlement was paid by American
      Ethanol.




*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 of
                $854,000.




F-16




NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2007 AND 2006




·
            American
                Ethanol, through its wholly owned subsidiary Sutton Ethanol, LLC,
                was
                currently 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.




F-17




NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2007 AND 2006




**12.**  **Acquisitions,
      Divestitures and Joint Ventures (contd.).**





·
            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, Inc. 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 is 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
                shall
                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





·
            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 are 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 acquisition of the Sutton and Wahoo membership interest, 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.




F-18




NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2007 AND 2006




**12.**  **Acquisitions,
      Divestitures and Joint Ventures (contd.).**





On
      August
      14, 2007 by mutual agreement of the parties American and E-85 dissolved their
      joint venture. American purchased E-85’s 50% interest in the Sutton JV for $16
      million in cash which they borrowed on a short term basis from the JV. As part
      of this repurchase American terminated its design contract with Delta T and
      was
      required to write off approximately $5.2 million in design work previously
      done
      by Delta T and its contractors and carried in construction in progress of the
      JV. This $5.2 million is included as an expense of the company as of December
      31, 2007. To compensate American for this loss, American 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 and E-85, including the loan facilities
      with Siva Limited, were terminated as of the date of the repurchase of the
      Sutton shares.





*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 Marwich resigned from the board and two members of American’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 will automatically convert
      into
      Common Stock immediately prior to the closing of the Merger) and Series B
      Preferred Stock will be 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 will be assumed and
      converted into an option or warrant exercisable for common stock of Marwich.
      The
      Merger is subject to the approval of both American’s and Marwich’s shareholders
      and certain other conditions. Upon the effectiveness of the Merger, Marwich
      would change its name to AE Biofuels, Inc. The 3,343,200 shares of Marwich
      purchased by American Ethanol will be 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,
      a Nevada corporation, in exchange for 200,000 shares of American Ethanol 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. Total compensation expense recorded to date under this award
      was $50,000. 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. Amortization expense to date is $66,666.





*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 is 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 will contribute approximately $15.4 million and Acalmar
      will contribute its edible palm oil facility in India to the joint venture
      through a leasing arrangement. The Company will own through its subsidiary
      a 74%
      interest in the venture while Acalmar will own 26% once the final payments
      under the agreement are made. At December 31, 2006 the Company had advanced
      the
      joint venture $3,380,000 toward the construction of the biodiesel facility
      and
      during the year ended December 31, 2007 contributed an additional $11,930,000
      (a
      total of $15,280,000).





Subsequent
      to December 31, 2007, the Company agreed to purchase Acalmar’s 26% interest in
      the joint venture and as of June 30, 2008 the Company will own 100% of the
      India
      venture. For the year ended December 31, 2007, Universal Biofuels Pvt.Ltd.
      contributed income of $594,295 to the consolidated income, principally from
      foreign currency exchange gains and interest income. This income is not subject
      to U.S. Federal Taxation until it is repatriated.




F-19




NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2007 AND 2006


**13.**  **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
      following lists the locations in which American Ethanol has acquired options
      on
      land as of the date of this Report.





On
      March
      2, 2006, Wahoo purchased two parcels of land in Wahoo, Nebraska. The total
      purchase price was $1,359,590. These parcels were subsequently sold to
      E85.





On
      March
      17, 2006, Sutton purchased land for its plant location in Sutton, Nebraska
      for
      the price of $597,406.





On
      February 20, 2006, AE Biofuels entered into an option agreement to purchase
      approximately 180 acres of land for a plant location in Grand Island, Nebraska.
      American paid $100,000 for this option which expires March 17, 2007. Subsequent
      to December 31, 2007, American extended these options for an additional six
      months at a cost of $25,000. This property was released and option cost of
      $125,000 was recognized as an expense.





On
      March
      3, 2006, AE Biofuels entered into two option agreements to purchase
      approximately 396 acres of land for a plant location in Webster County,
      Nebraska. American paid $100,000 for the options which expire March 1, 2007.
      American exercised its right to extend these options for a period of one year
      and paid an additional $3,600 in March 2007 for such extension. This property
      was released and option cost of $104,625 was recognized as an
      expense.





On
      April
      11, 2006, Illinois Valley entered into an option agreement to purchase
      approximately 363 acres of land in Dwight, Illinois. AE Biofuels paid $150,000
      for this option which expired September 15, 2006. This property was released
      and
      option cost of $150,000 was recognized as an expense.





On
      April
      27, 2006, AE Biofuels entered into an option agreement to purchase approximately
      145 acres of land for a plant location in Burt County, Nebraska. AE Biofuels
      paid $50,000 for the option which expired July 1, 2006. AE Biofuels elected
      not
      to exercise this option and recorded a $50,000 expense in July 2006 for the
      cost
      of the unexercised option.





On
      May
      13, 2006, AE Biofuels acquired through assignment 4 options to purchase
      approximately 175 acres of land for a plant location in Danville, Illinois.
      AE
      Biofuels paid $50,000 for these options which were exercised in December 2006
      and the purchase, totaling $2,319,995 closed on March 13, 2007 and is held
      by
      Danville Ethanol, LLC.





On
      June
      1, 2006, AE Biofuels acquired an option to purchase approximately 204 acres
      of
      land for a plant site in Gilman, IL. AE Biofuels paid $15,000 for this option
      which expires on June 1, 2008.





On
      August
      8, 2006, the Company acquired an option to purchase approximately 400 acres
      of
      land for a plant site in Red Cloud, NE for a cost of $100,000. The option
      expired on August 8, 2007 and option costs of $100,000 was recognized as
      expense.





On
      August
      14, 2006, the Company acquired an option for 373 acres of land in Litchfield,
      IL. The Company paid $18,000 for such option and it expires August 1, 2008.
      During 2007, $18,000 was recognized as an expense for this option.





On
      September 30, 2006, the Company acquired an option for 183 acres in Burt County,
      NE. The Company paid $147,500 for the option. This option expired July 1, 2007
      and the option cost of $147,500 was recognized as an expense.





On
      October 14, 2006, the Company acquired an option for 200 acres known as Stillman
      Valley in Ogle County, IL. The Company paid $35,000 for the option and it
      expires on August 1, 2008.





On
      October 15, 2006, the Company acquired an option to purchase approximately
      186
      acres of land for a plant site in Gridley, IL. The cost of this option was
      $74,500 and it expires on October 15, 2009.





On
      June
      1, 2006, AE Biofuels acquired through assignment an option to purchase
      approximately 200 acres in Mason County, Illinois. No cash was paid in exchange
      for the option, which expires April 15, 2008; provided, however, that if AE
      Biofuels decides to exercise the option, it will issue to the landowner 200,000
      shares of AE Biofuels Common Stock. AE Biofuels has the right to extend the
      term
      of the option to February 14, 2009.




F-20




NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2007 AND 2006




The
      aggregate purchase price of all land currently under option, if all options
      are
      exercised, is $10,114,230. 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 American Ethanol’s
      analysis of these and other factors.




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 results of American Ethanol’s analysis of these and other
      factors.





**14.**  **Commitments.**





*Third
      Party Contracts* :
      The
      Company engaged a third party in January 2006 for administrative, paralegal
      and
      staff support for $15,000 a month for three years. The Company also amended
      an
      arrangement with two individuals for financial advisory and management
      consulting services in January 2006 in the amount of $180,000 plus $10,000
      per
      month (for a one year minimum) and 2,120,000 shares of common
      stock.




*Construction
      Contracts*: The Company
      contracted with Desmet Bellastra India Put. Ltd. to build a glycerin plant
      in
      Kakinada, India. At December 31, 2007 construction contracts were outstanding
      for $1.85 million that will be funded with cash in our India
      subsidiary.




**15.**  **Related
      party transactions.**





A
      number
      of related party transactions occurred during 2007 and 2006, and are summarized
      below:





A
      director and significant shareholder of the Company loaned the Company
      $1,250,000 in two transactions in November and December 2006. The loans are
      short term notes with a term of nine months from the date of issue (November
      16,
      2006 for $1,000,000 and December 28, 2006 for $250,000) and carry a 10% per
      annum interest rate. The Company repaid $750,000 in principal plus accrued
      interest during the three months ended March 31, 2007. During the three months
      ended September 30, 2007, the Company borrowed an additional $575,000 from
      this
      individual under the same terms. The monies were used by the Company to pay
      operating expenses and to meet payment deadlines to our International Biofuels
      operation in India. The amounts owed under this obligation were repaid and
      as of
      December 31, 2007 nothing is owed.





Chadbourn
      Securities has acted as one of the Company’s placement agents with respect to
      the Company’s Series A and Series B Preferred Stock offerings throughout 2006
      and 2007. One of the Company’s directors and shareholders is an agent of
      Chadbourn and receives payments from Chadbourn related to the sale of stock
      along with other non-related parties. During 2007 the Company paid $314,602
      in
      fees and issued warrants exercisable for 195,388 shares of the Company’s Series
      B Preferred Stock at an exercise price of $3.00 per share in connection with
      the
      Company’s Series B Preferred Stock offering. During 2006, the Company paid
      $911,981 in fees and issued warrants exercisable for 800,000 shares of the
      Company’s common stock at an exercise price of $1.50 and warrants exercisable
      for 226,320 shares of the Company’s Series B Preferred Stock at an exercise
      price of $3.00 per share in connection with the Company’s Series A and Series B
      Preferred Stock offerings.





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 years ended December 31, 2007 and 2006,
      the
      Company paid Mr. McAfee $120,000 and $110,000, respectively, pursuant to this
      agreement.





The
      Company and CM Consulting are parties to an agreement pursuant to which the
      Company rents 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 year ended December 31, 2007
      and
      2006, the Company expensed $180,000 and $150,000 of this rental fee,
      respectively. CM Consulting is 50% owned by Eric McAfee, a director, officer
      and
      significant shareholder of the Company.




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 year ended December 31, 2007, the Company paid Cagan McAfee
      Capital Partners $180,000 for advisory services and $180,584 for office services
      and travel expenses.




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 a considered a
      strategic partner of the Company.





During
      October and December, we 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.




F-21




NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2007 AND 2006




**16.**  **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.





Components
      of tax expense consist of the following:




**Year
                Ended December 31,****2007**
            
            
            **2006**Current:Federal
            
            $
            33,664
            
            $
            -0-State
                and local
            
            
            19,421
            
            
            -0-Foreign
            
            
            25,499
            
            
            -0-78,584
            
            
            -0-Deferred:Federal
            
            
            -0-
            
            
            -0-State
                and local
            
            
            -0-
            
            
            -0-Foreign
            
            
            -0-
            
            
            -0--0-
            
            
            -0-Income
                tax expense
            
            $
            78,584
            
            $
            -0-





U.S.
      loss
      and foreign income before income taxes are as follows:




**Year
                Ended December 31,****2007**
            
            
            **2006**United
                States
            
            $
            (5,585,407
            )
            $
            (6,069,081
            )Foreign
            
            
            619,794
            
            
            0Income
                before income taxes
            
            $
            (4,965,613
            )
            $
            (6,069,081
            )





Income
      tax expense differs from the amounts computed by applying the statutory U.S.
      Federal income tax rate to income before income taxes as a result of the
      following:




**Year
                Ended December 31,****2007**
            
            
            **2006**Income
                tax expense at the federal statutory rate of 26%
            
            $
            (1,313,509
            )
            $
            -Increase
                (decrease) resulting from:Net
                gain on sale of subsidiary
            
            
            (805,212
            )
            
            -Non-deductible
                other costs
            
            
            5,232
            
            
            -Stock
                Compenstion
            
            
            331,880
            
            
            -Foreign
                Income
            
            
            (154,754
            )
            
            -Return
                to provision
            
            
            50,198Valuation
                Allowance
            
            
            1,964,749
            
            
            -Income
                tax expense
            
            $
            78,584
            
            $
            -





The
      components of the net deferred tax asset or liability are as
      follows:




**December 31,****2007**
            
            
            **2006****(In
                thousands)**Deferred
                tax assets:Organization
                and start-up costs
            
            $
            4,733,550
            
            $
            2,276,589Equity
                based compensation
            
            
            185,024
            
            
            224,750Loss
                on purchase of subsidiary
            
            
            9,323
            
            
            364,315Other,
                net
            
            
            (6,603
            )
            
            0Total
                gross deferred tax assets
            
            
            4,921,294
            
            
            2,862,474Less
                valuation allowance
            
            
            (4,921,294
            )
            
            (2,862,474
            )Deferred
                tax assets - long term, net
            
            $
            0
            
            $
            -0-




F-22




NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2007 AND 2006




Based
      on
      our evaluation of current and anticipated future taxable income, we believe
      it
      is more likely than not that insufficient taxable income will be generated
      to
      realize the net deferred tax assets, and accordingly, a valuation reserve has
      been set against these net deferred tax assets.




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 December 31, 2007, our unrecognized tax benefits
      were not significant.




We
      conduct business globally and, as a result, one or more of our subsidiaries
      file
      income tax returns in the U.S. federal jurisdiction and various state and
      foreign jurisdictions. In the normal course of business, we are subject to
      examination by taxing authorities throughout the world, including such major
      jurisdictions as India, Mauritius, and the United States. With few exceptions,
      we incorporated in 2006 and we are no longer subject to U.S. federal, state
      and local, or non-U.S. income tax examinations for years before
      2006.




In
      many
      cases the Company’s uncertain tax positions are related to tax years that remain
      subject to examination by tax authorities. The following describes the open
      tax
      years, by major tax jurisdiction, as of December 31, 2007:




United
                States — Federal
            
            2005
                - presentUnited
                States — State
            
            2005
                - presentIndia
            
            2006
                - presentMauritius
            
            2006
                - present





We
      file a
      U.S. Federal income tax return and tax returns in nine U.S. states, as well
      as
      in two foreign jurisdictions.  Currently, our U.S. Federal income tax
      returns dating back to 2005 are open to possible examination. Penalties and
      interest are classified as general and administrative expenses.




F-23




NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2007 AND 2006


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




On
      January 23, 2008, International Biofuels, Ltd (IBL) and Acalmar Oils and Fats,
      Ltd. (Acalmar) entered into a Termination Agreement where IBL agreed to pay
      $900,000 in cash to obtain Acalmar’s interest in Universal Biofuels Pvt. Ltd.
      Acalmar was relieved of its obligation to fund any additional capital as part
      of
      this agreement. Acalmar will continue to manage the interest of AE Biofuels'
      subsidiary under the Operating and Maintenance Agreement.




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, in the amount of $300,000 on March 14, 2008,
      and in
      the amount of $600,000 on March 27, 2008.




**18.**  **Contingent
      Liabilities.**




On
      July
      18, 2007, Logibio Albany Terminal, LLC filed a complaint against American
      Ethanol, Sutton Ethanol and Eric McAfee, the Company’s chairman, in the United
      States District Court for the Eastern District of Virginia. The complaint sought
      a declaratory judgment and damages for alleged fraud and interference with
      business expectancy. The complaint claimed that defendants falsely claimed
      a
      fifty percent ownership interest in Logibio Albany Terminal, misrepresented
      its
      ability to provide financing for plaintiff, and interfered with plaintiff’s
      attempts to obtain financing from third parties.




The
      complaint alleged approximately $6.9 million in incidental losses related to
      break up fees associated with one financier’s decision not to provide financing
      and the alleged difference between the terms of potential financing and actual
      financing received. Counsel for Logibio informed counsel for American Ethanol
      that financing had closed and, therefore, additional damage claims of lost
      ability to obtain financing are moot. This claim was settled in October 2007
      by
      mutual agreement of the parties with no payments or costs to either
      party.


The
        Company is aware that a shareholder, the Cordillera Fund, LP, asserts that
        it is
        entitled under Nevada dissenters' rights statutes to transfer 583,334 shares
        of
        Series B Preferred stock of American Ethanol, Inc. to the Company and to
        receive
        in exchange the fair market value for such shares from the Company. The Company
        has requested that the Cordillera Fund, LP, submit all factual information
        it
        may have that could support its assertion, but to date has received no such
        submission .
        The
        Company believes based upon their interpretation of the facts surrounding
        this
        matter and Nevada law that they have meritorious defenses against any claims
        by
        the Cordillera Fund, LP for dissenters rights. However any ultimate outcome
        of
        this matter is highly uncertain and difficult to predict at this early
        stage.




F-24




**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the Registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.





Date:
      March 28, 2008


**AE
                Biofuels, Inc.**/s/ Eric A.
              McAfee**________________________________________**Eric
                A. McAfeeChief
                Executive Officer
              (Principal
                Executive Officer)




**POWER
      OF ATTORNEY**




KNOW
      ALL
      PERSONS BY THESE PRESENTS, that each person whose signature appears below
      constitutes and appoints Eric A. McAfee and William J. Maender, and each of
      them, his true and lawful attorneys-in-fact, each with full power of
      substitution, for him in any and all capacities, to sign any amendments to
      this
      report on Form 10-K and to file the same, with exhibits thereto and other
      documents in connection therewith, with the Securities and Exchange Commission,
      hereby ratifying and confirming all that each of said attorneys-in-fact or
      their
      substitute or substitutes may do or cause to be done by virtue hereof.




Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the Registrant and in the
      capacities and on the dates indicated:


**Title**
            
            
            **Date**/s/
                Eric A. McAfee
            
            
            Chairman/Chief
                Executive Officer
            
            
            March
                28, 2008Eric
                A. McAfee
            
            
            (Principal
                Executive Officer and Director)/s/William
                J. Maender
            
            
            Chief
                Financial Officer and Secretary
            
            
            March
                28, 2008William
                J. Maender
            
            
            (Principal
                Financial and Accounting Officer)/s/
                Laird Q. Cagan
            
            
            Director
            
            
            March
                28, 2008Laird
                Q. Cagan/s/
                Michael Peterson
            
            
            Director
            
            
            March
                28, 2008Michael
                Peterson/s/
                Harold Sorgenti
            
            
            Director
            
            
            March
                28, 2008Harold
                Sorgenti/s/
                Surendra Ajjarapu
            
            
            President
                and Director
            
            
            March
                28, 2008Surendra
                Ajjarapu