UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q







|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended September 30, 2009

or



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from              to

Commission File Number: 0-24836





PetroAlgae Inc.

(Exact name of registrant as specified in its charter)







|                                               |  |                                  
|---------------------------------------------- |  | ---------------------------------
|Delaware                                       |  | 33-0301060                       
|(State or other jurisdiction of incorporation) |  | (IRS Employer Identification No.)
|                                               | 
|1901 S. Harbor City Blvd., Suite 300           |  |                                  
|Melbourne, FL                                  |  | 32901                            
|(Address of principal executive offices)       |  | (Zip Code)                       

Registrants telephone number, including area code: 321-409-7500





Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO   ̈

Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ̈    No  x

Indicate
by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Exchange Act Rule 12b-2).



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

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

The number of shares outstanding of the registrants common stock as of November 13, 2009 was 105,862,746 shares of common stock, all of one class.









---

PART I - FINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS
|------- | --------------------

PetroAlgae Inc.

(A Development Stage Company)

Consolidated Balance Sheets



|                                                                                                                         |  |                   |             |   |                  |   |             |  
|------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                         |  | September 30,2009 |             |   | December 31,2008 |  
|                                                                                                                         |  | (unaudited)       |             |   |                  |  
|ASSETS                                                                                                                   |  |                   |             |   |                  |   |             |  
|Current assets:                                                                                                          |  |                   |             |   |                  |   |             |  
|Cash                                                                                                                     |  | $                 | 680,243     |   |                  | $ | 10,416,823  |  
|Prepaid expenses                                                                                                         |  |                   | 57,088      |   |                  |   | 110,277     |  
|                                                                                                                         |  |                   |             |   |                  |   |             |  
|Total current assets                                                                                                     |  |                   | 737,331     |   |                  |   | 10,527,100  |  
|                                                                                                                         |  |                   |             |   |                  |   |             |  
|Property and equipment                                                                                                   |  |                   | 3,466,675   |   |                  |   | 1,390,712   |  
|Accumulated depreciation and amortization                                                                                |  |                   | (1,001,776  | ) |                  |   | (324,507    | )
|                                                                                                                         |  |                   |             |   |                  |   |             |  
|Net property and equipment                                                                                               |  |                   | 2,464,899   |   |                  |   | 1,066,205   |  
|                                                                                                                         |  |                   |             |   |                  |   |             |  
|Long-term deposits                                                                                                       |  |                   | 24,013      |   |                  |   | 5,000       |  
|                                                                                                                         |  |                   |             |   |                  |   |             |  
|Total assets                                                                                                             |  | $                 | 3,226,243   |   |                  | $ | 11,598,305  |  
|                                                                                                                         |  |                   |             |   |                  |   |             |  
|                                                                                                                         |  |                  
|LIABILITIES AND STOCKHOLDERS (DEFICIT)                                                                                  |  |                   |             |   |                  |   |             |  
|Current liabilities:                                                                                                     |  |                   |             |   |                  |   |             |  
|Accounts payable                                                                                                         |  | $                 | 1,117,288   |   |                  | $ | 1,043,285   |  
|Accrued expenses                                                                                                         |  |                   | 1,133,940   |   |                  |   | 1,786,341   |  
|Accrued expenses - related party                                                                                         |  |                   | 1,604,104   |   |                  |   | 349,779     |  
|Notes payable - related party                                                                                            |  |                   |            |   |                  |   | 7,639,601   |  
|Derivative liability                                                                                                     |  |                   | 3,500,000   |   |                  |   |            |  
|                                                                                                                         |  |                   |             |   |                  |   |             |  
|Total current liabilities                                                                                                |  |                   | 7,355,332   |   |                  |   | 10,819,006  |  
|                                                                                                                         |  |                   |             |   |                  |   |             |  
|                                                                                                                         |  |                  
|Long-term liabilities:                                                                                                   |  |                   |             |   |                  |   |             |  
|Notes payable - related party                                                                                            |  |                   | 35,251,547  |   |                  |   | 16,921,243  |  
|Other long term liabilities                                                                                              |  |                   | 758,917     |   |                  |   | 758,917     |  
|                                                                                                                         |  |                   |             |   |                  |   |             |  
|Total liabilities                                                                                                        |  |                   | 43,365,796  |   |                  |   | 28,499,166  |  
|                                                                                                                         |  |                   |             |   |                  |   |             |  
|                                                                                                                         |  |                  
|Stockholders (deficit):                                                                                                 |  |                   |             |   |                  |   |             |  
|Preferred stock - $.001 par value, 25,000,000 shares authorized, no shares issued or outstanding                         |  |                   |            |   |                  |   |            |  
|Series B - 10,000,000 shares authorized                                                                                  |  |                   |             |   |                  |   |             |  
|Undesignated - 15,000,000 shares authorized                                                                              |  |                   |             |   |                  |   |             |  
|Common stock - $.001 par value, 300,000,000 shares authorized, 104,425,246 and 104,274,189 shares issued and
outstanding |  |                   | 104,863     |   |                  |   | 104,274     |  
|Paid in capital                                                                                                          |  |                   | 14,757,313  |   |                  |   | 13,466,546  |  
|Deferred compensation                                                                                                    |  |                   | (1,925,000  | ) |                  |   | (3,106,250  | )
|(Deficit) accumulated during the development stage                                                                       |  |                   | (48,819,810 | ) |                  |   | (27,365,431 | )
|                                                                                                                         |  |                   |             |   |                  |   |             |  
|                                                                                                                         |  |                   | (35,882,634 | ) |                  |   | (16,900,861 | )
|Noncontrolling interest                                                                                                  |  |                   | (4,256,919  | ) |                  |   |            |  
|                                                                                                                         |  |                   |             |   |                  |   |             |  
|Total stockholders (deficit)                                                                                            |  |                   | (40,139,553 | ) |                  |   | (16,900,861 | )
|                                                                                                                         |  |                   |             |   |                  |   |             |  
|Total liabilities and stockholders (deficit)                                                                            |  | $                 | 3,226,243   |   |                  | $ | 11,598,305  |  
|                                                                                                                         |  |                   |             |   |                  |   |             |  

See the accompanying notes to the financial statements.



---

PetroAlgae Inc.

(A Development Stage Company)

Consolidated
Statements of Operations

(Unaudited)



|                                                      |  |                    |             |   |                   |   |             |                                                                       |  |   |                   |   |  |   |             |   |  |   |             |  
|----------------------------------------------------- |  | ------------------ | ----------- | - | ----------------- | - | ----------- | --------------------------------------------------------------------- |  | - | ----------------- | - |  | - | ----------- | - |  | - | ----------- | -
|                                                      |  | Three Months Ended |             |   | Nine Months Ended |   |             | From the period fromInception(September 22, 2006)to September 30,2009 | 
|                                                      |  | September 30,2009  |             |   | September 30,2008 |   |             | September 30,2009                                                     |  |   | September 30,2008 |   | 
|Revenue                                               |  | $                  |            |   |                   | $ |            |                                                                       |  | $ |                  |   |  | $ |            |   |  | $ |            |  
|                                                      |  |                    |             |   |                   |   |             |                                                                       |  |   |                   |   |  |   |             |   |  |   |             |  
|                                                      |  |                    |             |   |                  
|Costs and expenses:                                   |  |                    |             |   |                   |   |             |                                                                       |  |   |                   |   |  |   |             |   |  |   |             |  
|General and administrative                            |  |                    | 2,079,448   |   |                   |   | 1,875,836   |                                                                       |  |   | 6,661,699         |   |  |   | 3,570,736   |   |  |   | 13,496,712  |  
|Research and development                              |  |                    | 5,298,286   |   |                   |   | 2,202,147   |                                                                       |  |   | 17,179,674        |   |  |   | 6,751,159   |   |  |   | 36,091,512  |  
|Interest expense, net of interest income              |  |                    | 807,719     |   |                   |   | 312,907     |                                                                       |  |   | 1,869,925         |   |  |   | 747,500     |   |  |   | 3,561,436   |  
|                                                      |  |                    |             |   |                   |   |             |                                                                       |  |   |                   |   |  |   |             |   |  |   |             |  
|Total costs and expenses                              |  |                    | 8,185,493   |   |                   |   | 4,390,890   |                                                                       |  |   | 25,711,298        |   |  |   | 11,069,395  |   |  |   | 53,149,660  |  
|                                                      |  |                    |             |   |                   |   |             |                                                                       |  |   |                   |   |  |   |             |   |  |   |             |  
|Net loss before non-controlling interest              |  |                    | (8,185,493  | ) |                   |   | (4,390,890  | )                                                                     |  |   | (25,711,298       | ) |  |   | (11,069,395 | ) |  |   | (53,149,660 | )
|Non-controlling interest                              |  |                    | 1,372,507   |   |                   |   |            |                                                                       |  |   | 4,256,.919        |   |  |   |            |   |  |   | 4,329,850   |  
|                                                      |  |                    |             |   |                   |   |             |                                                                       |  |   |                   |   |  |   |             |   |  |   |             |  
|Net loss                                              |  | $                  | (6,812,986  | ) |                   | $ | (4,390,890  | )                                                                     |  | $ | (21,454,379       | ) |  | $ | (11,069,395 | ) |  | $ | (48,819,810 | )
|                                                      |  |                    |             |   |                   |   |             |                                                                       |  |   |                   |   |  |   |             |   |  |   |             |  
|Net loss per share - basic and diluted                |  | $                  | (0.07       | ) |                   | $ | (0.04       | )                                                                     |  | $ | (0.21             | ) |  | $ | (0.11       | ) |  |   |             |  
|                                                      |  |                    |             |   |                   |   |             |                                                                       |  |   |                   |   |  |   |             |   |  |   |             |  
|Weighted average shares outstanding basic and diluted |  |                    | 104,425,246 |   |                   |   | 100,000,000 |                                                                       |  |   | 104,408,156       |   |  |   | 100,000,000 |   |  |   |             |  
|                                                      |  |                    |             |   |                   |   |             |                                                                       |  |   |                   |   |  |   |             |   |  |   |             |  

See the accompanying notes to the financial statements.



---

PetroAlgae Inc.

(A Development Stage Company)

Consolidated
Statements of Cash Flows

(Unaudited)



|                                            |  |                   |             |   |                                                                       |   |            |   |  |   |             |  
|------------------------------------------- |  | ----------------- | ----------- | - | --------------------------------------------------------------------- | - | ---------- | - |  | - | ----------- | -
|                                            |  | Nine Months Ended |             |   | From the period fromInception(September 22, 2006)to September 30,2009 |  
|                                            |  | September 30,2009 |             |   | September 30,2008                                                     |   |           
|Cash flows from operating activities:       |  |                   |             |   |                                                                       |   |            |   |  |   |             |  
|Net cash (used in) operating activities     |  | $                 | (21,200,617 | ) |                                                                       | $ | (7,362,146 | ) |  | $ | (38,036,215 | )
|                                            |  |                   |             |   |                                                                       |   |            |   |  |   |             |  
|                                            |  |                   |            
|Cash flows from investing activities:       |  |                   |             |   |                                                                       |   |            |   |  |   |             |  
|Acquisition of property and equipment       |  |                   | (2,075,963  | ) |                                                                       |   | (623,091   | ) |  |   | (3,466,675  | )
|                                            |  |                   |             |   |                                                                       |   |            |   |  |   |             |  
|Net cash (used in) investing activities     |  |                   | (2,075,963  | ) |                                                                       |   | (623,091   | ) |  |   | (3,466,675  | )
|                                            |  |                   |             |   |                                                                       |   |            |   |  |   |             |  
|                                            |  |                   |            
|Cash flows from financing activities:       |  |                   |             |   |                                                                       |   |            |   |  |   |             |  
|Proceeds from notes payable - related party |  |                   | 10,000,000  |   |                                                                       |   | 9,879,988  |   |  |   | 28,194,601  |  
|Shares issued for cash and services         |  |                   | 3,500,000   |   |                                                                       |   |           |   |  |   | 13,988,532  |  
|                                            |  |                   |             |   |                                                                       |   |            |   |  |   |             |  
|Net cash provided by financing activities   |  |                   | 13,500,000  |   |                                                                       |   | 9,879,988  |   |  |   | 42,183,133  |  
|                                            |  |                   |             |   |                                                                       |   |            |   |  |   |             |  
|Net increase (decrease) in cash             |  |                   | (9,776,580  | ) |                                                                       |   | 1,894,751  |   |  |   | 680,243     |  
|Cash - beginning of period                  |  |                   | 10,416,823  |   |                                                                       |   | 184,145    |   |  |   |            |  
|                                            |  |                   |             |   |                                                                       |   |            |   |  |   |             |  
|Cash - end of period                        |  | $                 | 640,243     |   |                                                                       | $ | 2,078,896  |   |  | $ | 680,243     |  
|                                            |  |                   |             |   |                                                                       |   |            |   |  |   |             |  
|                                            |  |                   |            
|Cash paid for:                              |  |                   |             |   |                                                                       |   |            |   |  |   |             |  
|Interest                                    |  | $                 |            |   |                                                                       | $ |           |   |  | $ |            |  
|Income taxes                                |  | $                 |            |   |                                                                       | $ |           |   |  | $ |            |  

See the accompanying notes to the financial statements.



---

PetroAlgae Inc.

(A Development Stage Company)

Notes to Unaudited
Consolidated Financial Statements

September 30, 2009

Note 1 Basis of Presentation

The
accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and Rule 8.03 of Regulation S-X. They do not
include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have
been included. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. For further information, refer to the financial statements of the Company as of December 31, 2008
and 2007 and for the years then ended included in the Companys Form 10-K.

The accompanying financial statements are prepared in
accordance with U.S. GAAP, which require management to make estimates and assumptions. These estimates and assumptions 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 amounts of revenue and expense. Actual results may differ from these estimates.

In preparing the
accompanying financial statements, we have evaluated subsequent events through November 16, 2009, the issuance date of this Form 10-Q, we have determined that no events or the transaction have occurred subsequent to September 30, 2009, which require
recognition or disclosure in the financial statements other than that which is disclosed on Note 6.

Organization

On December 16, 2008, Corporate Services International, a Delaware corporation, sold 9,000,000 shares of Series B preferred stock
of Dover Glen, Inc. and 10,000,000 shares of common stock of Dover Glen, Inc. to PetroTech Holdings Corp., a Delaware corporation (PetroTech Holdings), for $350,000 in a private placement transaction.

On December 16, 2008, PetroTech Holdings submitted a conversion notice to Dover Glen, Inc. for its 9,000,000 shares of Series B preferred stock. Each
share of Series B preferred stock of the Company converted into 10 shares of common stock of the Company. As a result of the acquisition of shares and subsequent conversion, PetroTech Holdings was the owner of 100,000,000 shares of common stock of
Dover Glen, Inc. which, as of December 16, 2008, represented 99.9% of the total issued and outstanding common stock of Dover Glen, Inc.

On December 19, 2008, PetroTech Holdings assigned its entire interest in PetroAlgae LLC (PA LLC), representing approximately 81.3% of the membership interests on a fully diluted basis of PA LLC, to Dover Glen, Inc. for no
consideration. This assignment had the effect of causing Dover Glen, Inc. to cease being a shell company. As a result of the assignment, the business of PA LLC has become the sole line of business of Dover Glen, Inc. Also, on December 19, 2008,
Dover Glen, Inc. changed its name to PetroAlgae Inc.

As the former members of PA LLC control PetroAlgae Inc. after the
transaction, the merger was accounted for as a reverse acquisition under which, for accounting purposes, PA LLC is deemed to be the acquirer and PetroAlgae Inc., the legal acquirer, is deemed to be the acquired entity. No goodwill was recognized as
PetroAlgae Inc. was a shell company. The former shareholders of PetroAlgae Inc. retained an aggregate of 99,586 shares of common stock and the excess of the liabilities assumed over the assets received at the acquisition date of $67,712
has been reclassified to equity.

PA LLC was created on September 22, 2006, in the State of Delaware to develop and commercialize
proprietary technologies to grow and harvest micro-crops to produce renewable feedstocks for the petroleum industry. These designs would be licensed to partners around the world in return for license fees and ongoing royalties.

The Company is currently in the development stage as defined in SFAS 7.

Principles of Consolidation

The consolidated financial statements presented herein
include the accounts of the Company and its consolidated subsidiary PA LLC of which the Company owns approximately 81.5% on a fully diluted basis.



---

PetroAlgae Inc.

(A Development Stage Company)

Notes to Unaudited
Consolidated Financial Statements(Continued)

September 30, 2009



All intercompany transactions and balances have been eliminated in consolidation.

Basis of Reporting

The Companys financial statements are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. At September 30, 2009, the Company had a
working capital deficit of $6,618,001, an accumulated deficit of $48,819,810, and a stockholders deficit of $40,139,553. In addition, the Company has not generated revenues to date.

The Companys ability to continue as a going concern is contingent upon its ability to secure additional financing, increase ownership equity, and
attain profitable operations. In addition, the Companys ability to continue as a going concern must be considered in light of the problems, expenses and complications frequently encountered in established markets and the competitive
environment in which the Company operates.

The Company is pursuing financing for its operations and seeking additional investments. In
addition, the Company is seeking to establish a revenue base. Failure to secure such financing or to raise additional equity capital and to establish a revenue base may result in the Company depleting its available funds and not being able to pay
its obligations.

The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.

Recent Accounting Pronouncements

Accounting Standards Codification - In June, 2009,
FASB established the FASB Accounting Standards Codification (ASC) as the single source of authoritative GAAP. The ASC is a new structure which took existing accounting pronouncements and organized them by accounting topic. Relevant
authoritative literature issued by the Securities and Exchange Commission (SEC) and select SEC staff interpretations and administrative literature was also included in the ASC. All other accounting guidance not included in the ASC is
non-authoritative. The ASC is effective for interim and annual reporting periods ending after September 15, 2009. The adoption of the ASC did not have an impact on the Companys consolidated financial position, results of operations or cash
flows.

Subsequent Events - In May, 2009, the ASC guidance for subsequent events was updated to establish accounting and reporting standards
for events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The update sets forth: (i) the period after the balance sheet date during which management of a reporting entity should
evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet in its
financial statements, and (iii) the disclosures that an entity should make about events or transactions occurring after the balance sheet date in its financial statements. The new guidance requires the disclosure of the date through which subsequent
events have been evaluated. The Company adopted the updated guidance in 2009. The adoption had no impact on the Companys consolidated financial position, results of operations or cash flows.

Fair Value Accounting - In August 2009, the ASC guidance for fair value measurements and disclosure was updated to further define fair value of liabilities.
This update provides clarification for circumstances in which: (i) a quoted price in an active market for the identical liability is not available, (ii) the liability has a restriction that prevents its transfer, and (iii) the identical liability is
traded as an asset in an active market in which no adjustments to the quoted price of an asset are required. The updated guidance is effective for the Companys interim reporting period beginning October 1, 2009. The Company is evaluating the
potential impact of adopting this guidance on the Companys consolidated financial position, results of operations and cash flows.

Variable Interest Entities - In June 2009, the ASC guidance for consolidation accounting was updated to require an entity to perform a qualitative analysis to determine whether the enterprises variable interest gives it a controlling
financial interest in a variable interest entity (VIE). This analysis identifies a primary beneficiary of a VIE as the entity that has both of the following characteristics: (i) the power to direct the activities of a VIE that most
significantly impact the entitys economic performance and (ii) the obligation to absorb losses or receive benefits from the entity that could potentially be significant to the VIE. The updated guidance also requires ongoing reassessments of
the primary beneficiary of a VIE. The updated guidance is effective for the Companys fiscal year beginning January 1, 2010. The Company currently is evaluating the potential impact of adopting this guidance on the Companys consolidated
financial position, results of operations and cash flows.

There were no other accounting standards and interpretations recently issued which
are expected to a have a material impact on the Companys financial position, results of operations or cash flows.

Note
2 Property and Equipment

Property and equipment and related accumulated consist of the following:



|                                                                        |  |                   |            |  
|----------------------------------------------------------------------- |  | ----------------- | ---------- | -
|                                                                        |  | September 30,2009 |           
|Leasehold improvements                                                  |  | $                 | 580,649    |  
|Furniture and fixtures                                                  |  |                   | 81,716     |  
|Automobiles                                                             |  |                   | 62,641     |  
|Computer and office equipment                                           |  |                   | 223,672    |  
|Engineering equipment                                                   |  |                   | 2,138,303  |  
|Software and networking                                                 |  |                   | 379,694    |  
|                                                                        |  |                   |            |  
|Total cost basis                                                        |  |                   | 3,466,675  |  
|Less accumulated depreciation and amortization                          |  |                   | (1,001,776 | )
|                                                                        |  |                   |            |  
|Property and equipment net of accumulated depreciation and amortization |  | $                 | 2,464,899  |  
|                                                                        |  |                   |            |  

Note 3 Notes Payable  Related Party

In April and May 2009, PetroTech Holdings Corp. provided $10,000,000 of additional funding under convertible demand notes with interest at 12% per
annum. The notes are convertible into shares of the Companys common stock at $5.43 per share. The Company entered into a non binding merger letter with PetroTech Holdings Corp. This agreement provides for a combination of the two companies
subject to the attainment for a twelve month consecutive period of EBIDA of not less than $100 million by the Company and other restrictions described in the letter.



On July 24, 2009, the Company entered into agreements with its principle
lender to restructure all of the Companys loans. The Company, PA LLC, PetroTech Holdings Corp., and LV Administrative Services, Inc., as administrative and collateral agent for PetroTech Holdings Corp., fully executed an Omnibus
Amendment, Joinder and Reaffirmation Agreement, which amended (i) the demand notes issued by PA LLC to PetroTech Holdings Corp. dated August 21, 2008, September 3, 2008, September 18, 2008 and September 25, 2008 in
the aggregate principal amount of $7,222,089, (ii) the convertible demand notes issued by PA LLC to PetroTech Holdings Corp. dated April 24, 2009 and May 11, 2009 in the aggregate principal amount of $10,000,000,
(iii) the promissory note dated June 12, 2008 issued by PA LLC in favor of XL Techgroup, Inc. and assigned to PetroTech Holdings Corp. in the principal amount of $25,000,000 and (iv) a master security agreement dated August 21,
2008 by PA LLC in favor of LV Administrative Services, Inc. on behalf of PetroTech Holdings Corp. The Company also delivered an equity pledge agreement and a guaranty in connection with the Omnibus Amendment, Joinder and Reaffirmation Agreement.
Principally, the maturity of the loans was changed to three years from this date.

Notes payable consist of the following at September
30, 2009:



|                                                                             |  |   |           
|---------------------------------------------------------------------------- |  | - | ----------
|Collateral  all assets of the Company                                       |  |   |           
|Due date  June 30, 2012                                                     |  |   |           
|                                                                             |  |   |           
|Interest  12% per annum                                                     |  |   |           
|Valens US                                                                    |  | $ | 417,512   
|PetroTech Holdings Corp.                                                     |  |   | 7,222,089 
|PetroTech Holdings Corp.  convertible into common shares at $5.43 per share |  |   | 10,000,000
|Interest  Prime + 2% per annum                                              |  |   |           
|PetroTech Holdings Corp.                                                     |  |   | 17,611,946
|                                                                             |  |   |           
|                                                                             |  | $ | 35,251,547
|                                                                             |  |   |           



---

PetroAlgae Inc.

(A Development Stage Company)

Notes to Unaudited
Consolidated Financial Statements(Continued)

September 30, 2009



Note 4 Stockholders (Deficit)

The Companys equity consists of the following:

300,000,000 shares of $.001 par value common stock authorized; 25,000,000 shares of $.001 par value preferred stock of which 15,000,000 shares are undesignated; and 10,000,000 shares are designated as
series B. Each share of series B preferred stock is entitled to 10 votes on all matters voted on and is convertible into 10 shares of common stock at the option of the holder.

At Inception (September 22, 2006) the Company issued 100,000,000 shares of common stock in exchange for cash of $488,532.

During December 2008 the Company issued 3,174,603 shares of common stock for cash of $3.15 per share aggregating $10,000,000 pursuant to a private placement.

During December 2008 the Company issued 1,000,000 shares of common stock for consulting services to be performed through December 2010. The shares were
valued at $3.15 per share aggregating $3,150,000 based on the sale of common stock described above which approximated fair market value on the date it was agreed the shares would be issued. The $3,150,000 was recorded as deferred compensation and
$1,225,000 was amortized through September 30, 2009.

On January 15, 2009, PetroAlgae Inc. (the Company) entered into a
Stock Purchase Agreement with Engineering Automation and Design Inc., a Nebraska corporation (EAD), pursuant to which the Company issued 151,057 shares of common stock, par value $0.001 per share, of the Company (the Shares)
as partial consideration for certain services relating to the design and engineering, and construction of facilities for the growth and harvesting of algae for the production of algae oil provided by a wholly-owned subsidiary of EAD to the
Companys subsidiary, PA LLC. The fair value of the shares was approximately $6.62 per share or $1,000,000 in the aggregate which was charged to operations during the period.

During August and September 2009 the Company issued 437,500 shares of common stock and 437,500 common stock purchase warrants exercisable at $15.00 per share for a period of 5 years for cash aggregating
$3,500,000 to an affiliate. The purchase price of the common stock and the exercise price of the warrants will be adjusted in the event that the Company issues common stock or warrants at a price below $8.00 for common shares or a $15.00 exercise
price for warrants for a period of six months from the purchase date. Because of these potential adjustments, the shares issued and the warrants are accounted for as derivative instrument liabilities in accordance with ASC guidance. The cash
proceeds received of $3,500,000 were allocated between the common stock and the warrants and the initial fair values of the common stock and warrants of $2,375,625 and $1,124,375, respectively, were recorded as derivative instrument liabilities. For
the warrants, the Company estimated the fair value using the Black-Scholes valuation model, based on the estimated fair value of the common stock on the valuation date, an expected dividend yield of 0%, a risk-free interest rate based on constant
maturity rates published by the U.S. Federal Reserve applicable to the remaining term of the instruments, an expected life equal to the remaining term of the instruments and an implicit volatility of 82%. Because of the limited historical trading
period of the Companys common stock, the limited number of shares held by non-affiliates and the very small trading volume of our common stock, the fair value of the common stock was estimated at $5.43 per share based on the conversion price
of the $10,000,000 note described in Note 3 and the implicit volatility of 82% was determined based on the aggregate cash proceeds received. The Company is required to re-measure the fair value of these derivative instrument liabilities at each
reporting period. At the expiration of the six month price guarantee period, it is expected that the common stock and warrants will no longer be required to be accounted for as derivative instruments and will be reclassified to equity.

Noncontrolling Interest and PA LLC Equity Incentive Plan

During 2007 the Company issued 5% of the Class A voting units (1,000,000 units) of PA LLC valued at $25,713 as partial consideration for a license to AzTE. AzTE has been granted anti-dilution and is
entitled to 5% of the fully diluted capitalization of PA LLC prior to the closing of any IPO. Pursuant to the non dilution clause, the Company will be required to issue AzTE an additional 165,472 units as of September 30, 2009.

PA LLC has registered an equity compensation plan with the Securities and Exchange Commission on Form S-8 to provide employees and consultants with awards
of interests denominated as Class B units and limited to 14% of the total outstanding units.

PA LLC granted 3,142,071 units to various
employees through unit grant agreements. The unit grants generally vest over four years of continual service. The fair value of these grants was determined by the Company as 95,402 at the grant date, and related charges of $7,385 and $4,278 were
included in operating expenses at September 30, 2009, and 2008, respectively. The fair value of the unit grants was determined using the transaction that took place in 2006 where XL TechGroup, Inc. contributed $488,532 into PA LLC, and in
return, received 19,000,000 units of PA LLC ($.03 per unit). As of September 30, 2009, the total unrecognized compensation cost for non-vested unit grants granted under the Plan was $545,102 which will be amortized over the remaining vesting
periods. In addition to the amortization of the fair value of units, the Company also recognizes an operational expense of $.01 per unit granted to employees. This has resulted in an additional expense of $1,429 through September 30, 2009.

As of September 30, 2009, non-controlling interest parties collectively owned 18.49% of PA LLC, and have absorbed their respective
portion of the loss of PA LLC. The amount of loss absorbed is $4,256,919 for the nine months ending September 30, 2009.



---

PetroAlgae Inc.

(A Development Stage Company)

Notes to Unaudited
Consolidated Financial Statements(Continued)

September 30, 2009



Stock Options

On June 17 and July 16, 2009 the Company granted an aggregate of 1,072,500 and 45,000 options to purchase common shares at an exercise price of $8.50 and $8.00, respectively, per share. The
options vest over a period of 4 years and expire 10 years from the grant date. The fair value of the options aggregated $4,672,500 and was calculated using the following assumptions  term 10 years, risk free interest rate 1.0% volatility 82%,
and dividend yield 0%. The fair value is charged to operations over the vesting period commencing on July 1, 2009.

During the three
months ended September 30, 2009, $292,000 was charged to operations.

A summary of stock option activity is as follows:



|                              |  |                |  |                              |      |                          |   |     
|----------------------------- |  | -------------- |  | ---------------------------- | ---- | ------------------------ | - | ----
|                              |  | Numberofshares |  | Weightedaverageexerciseprice |      | Weightedaveragefairvalue
|Balance at December 31, 2008  |  |               |  |                              |     |                          |   |    
|Granted June 17, 2009         |  | 1,072,500      |  | $                            | 8.50 |                          | $ | 4.18
|Granted July 16, 2009         |  | 45,000         |  | $                            | 8.00 |                          | $ | 4.21
|Exercised/Forfeited           |  |               |  | $                            |     |                          | $ |    
|Balance at September 30, 2009 |  | 1,117,500      |  | $                            | 8.50 |                          | $ | 4.18

The following table summarizes information about fixed-price stock options at September 30,
2009:



|                |  |                                  |  |                                |  |                              |      |                   |   |               |   |  
|--------------- |  | -------------------------------- |  | ------------------------------ |  | ---------------------------- | ---- | ----------------- | - | ------------- | - | -
|                |  | Outstanding                      |  | Exercisable                   
|Exercise Prices |  | WeightedAverageNumberOutstanding |  | WeightedAverageContractualLife |  | WeightedAverageExercisePrice |      | NumberExercisable |   | ExercisePrice
|$8 - 8.50       |  | 1,117,500                        |  | 10 years                       |  | $                            | 8.48 |                   |  |               | $ | 

Note 5 Related Party Transactions

The Company currently sub leases office space from XL TechGroup, Inc. on a month to month basis at a rate of $41,222 per month.

Note 6 Subsequent Events

During
October 2009 the Company issued 875,000 shares of common stock and 875,000 common stock purchase warrants exercisable at $15.00 per share for a period of 5 years to third parties for cash aggregating $7,000,000. The purchase price of 375,000 of the
common stock and the exercise price of 375,000 of the warrants will be adjusted in the event that the Company issues common stock or warrants at a price below $8.00 for common shares or a $15.00 exercise price for warrants for a period of six months
from the purchase date.

During October 2009 the Company issued 125,000 shares of common stock and 125,000 common stock purchase warrants
exercisable at $15.00 per share for a period of 5 years for cash aggregating $1,000,000 to an affiliate. The purchase price of the common stock and the exercise price of the warrants will be adjusted in the event that the Company issues common stock
or warrants at a price below $8.00 for common shares or a $15.00 exercise price for warrants for a period of six months from the purchase date.



---

|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

The following discussion contains forward-looking statements that involve numerous risks and uncertainties, such as statements of our plans, objectives,
expectations, and intentions. Our actual results could differ materially from those anticipated in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed in this report under Risk
Factors, as well as those discussed elsewhere in this report. You should read the following discussion and analysis in conjunction with the Companys financial statements and related notes, each included elsewhere in this report.

Overview

PetroAlgae is a development stage company which is demonstrating, and commercializing for license, new technologies to grow and harvest micro-crops that produce renewable feedstocks for the petroleum industry. This is intended to result in
fuels that are functionally interchangeable to petroleum based and other transportation fuels. The corporate strategy is to select the most suitable microorganism for each specific location (indigenous to the region) and application, and then apply
PetroAlgaes distinct proprietary processes to scale its growth rate productivity) from that of a microorganism to that of a high output-producing micro-crop. Micro-crops include algae, diatoms, micro-angiosperms, cyanobacters and other small
fuel and food-producing organisms with extremely rapid growth potential. The feedstock key to increasing the Productivity of the microorganism includes detailed control of the amount of light to which the crop is exposed.

Along with the feedstock for the petroleum industry, a complementary co-product which may be produced from these micro-crops is high-quality proteins. These
proteins are appropriate for incorporation into both human and animal foods. The Company has received first approval from a country, Indonesia, to use the protein product for animal feed.

The Company completed recently its pilot demonstration system in Florida. This site serves as a pilot, with commercial-scale bioreactors which demonstrate
end-to-end processing from biomass growth, harvesting, dewatering, and through the processing and drying of both protein and biomass feedstock from which transportation fuels could then be produced. Utilizing full commercial-scale bioreactors, this
site will generates significant quantities of biomass, along with representative products under measured production disciplines. These materials are used for testing and customer samples, which management expects will provide analytical results to
further support the value proposition to our potential license partners.

As the Company is successful in developing these technologies, the
Company will continue to sell licenses for these technologies to partners in specific geographic regions, for a specified area of production. The sales cycle for these units can take many months while the license partners evaluate the effectiveness
and economics of applying this technology to their region. The Company will assist in the deployment of this technology to licensees with modular bioreactor systems that can be built and operated cost-effectively on a very large commercial scale.
Sizes of these licensed units will vary, but is expected to be approximately 5,000 hectors (12,355 acres) per unit.

The Company
previously announced its first license agreement for multiple system deployment in China. GTB-Power, the master licensee, continues to pursue its requisite land and other approvals from the initial sub-licensees. The Company has provided an
extension of time in which these milestones, resulting in first license payment, are to be completed. For this extension the Company has received modification to the terms, accelerating certain Milestones and deliverables to the Companys
benefit. Management believes that initial payments from China will begin this year; however, as these payments are contingent on government permitting a risk of delayed payment exist. The Company is free to pursue other options in the event that the
milestone is not completed.

PetroAlgae has incurred losses since inception of operations on June 22, 2006 and has an accumulated deficit of
$48,819,810 as of September 30, 2009. PetroAlgaes losses have resulted principally from its continued research and development expenses and construction of a multi-acre pilot demonstration system.

As a development stage company, the Company expects that in 2009 it will start to realize license fees from customers, license fees in advance of subsequent
royalty payments. For the remainder of this year, we expect continued progress commercializing our proprietary technologies. While we strive to maintain proper cost and spending controls, our expenditures through the third quarter of 2009 will
reflect the operation of the demonstration pilot system and increases in marketing and business development expenses as the Company continues to prepare for customer deployment.



---

Results of operations for the three months ended September 30, 2009, compared to
the three months ended September 30, 2008

Revenue

Since PetroAlgaes inception, we have generated no revenue. In general, the company expects to record and recognize revenue when persuasive evidence of
an arrangement exists, services have been rendered or product delivery has occurred.

Costs and expenses

The Companys total costs and expenses for the three months ended September 30, 2009 increased $3.8 million to $8.2 million. An increase of
86% as compared to $4.4 million for the three months ended September 30, 2008.

General and administrative expenses:Total
general and administrative expenses increased to $2.1 million in the three months ended September 30, 2009, as compared to $1.9 million in the three months ended September 30, 2008. During the period from inception (September 22,
2006) through August 1, 2008, a portion of the Companys general and administrative activities were provided directly by XL TechGroup for support services and recorded as related party expenses separate from direct third party expenses.
The Company expects that general and administrative expenses for the fourth quarter of this year will continue at the same level as during the third quarter.

Research and development expenses:Total research and development expenses increased $3 million (or 130%) to $5.3 million for the three months ended September 30, 2009 as compared to $2.3
million for the three months ended September 30, 2008. The Companys effort to complete the various system components and the design and construction of the commercial scaled pilot system for customer demonstration was a significant
contributor to this increase. The Company expects that expenses related to the pilot system will be significantly less for the balance of this year.

Interest expense:Interest expense (net of interest income) on PetroAlgaes debt outstanding under its notes with PetroTech Holdings Corp. (PetroTech Holdings Corp. assumed the note from XL TechGroup in August 2008) and
Laurus/Valens is $0.8 million for the three months ended September 30, 2009, as compared to $0.3 million for the three months ended September 30, 2008. The increase was principally the result of additional accumulated borrowings of
approximately $20 million from the comparable period to the current reporting period.

Non-controlling interest

Due to changes in accounting pronouncements, the Company has begun, as of March 31, 2009, recording non-controlling party interest.
The amount absorbed is $1.4 million for the three months ended September 30, 2009.

Results of operations for the
nine months ended September 30, 2009, compared to the nine months ended September 30, 2008

Revenue

Since PetroAlgaes inception, we have generated no revenue. In general, the Company expects to record and recognize revenue when
persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred.

Costs and
expenses

The Companys total costs and expenses for the nine months ended September 30, 2009 increased $14.6 million to $25.7
million. An increase of 132% as compared to $11.1 million for the nine months ended September 30, 2008.

General and
administrative expenses:Total general and administrative expenses increased $3.1 million (or 86%) to $6.7 million for the nine months ended September 30, 2009 as compared to $3.6 million for the nine months ended September 30,
2008. General and administrative expenses include the Companys public company costs, legal, general corporate overheads, business development, information technology, and intellectual property management. During the period from inception
(September 22, 2006) through August 1, 2008, a portion of the Companys general and administrative activities were provided directly by XL TechGroup for support services and recorded as related party expenses separate from direct third
party expenses.

Research and development expenses:Total research and development expenses increased $10.4 million (or 153%) to
$17.2 million for the nine months ended September 30, 2009 as compared to $6.8 million for the nine months ended September 30, 2008. Development costs include the research and experimentation of the various system components and the design
and construction of the commercial scaled pilot system for customer demonstration. Included in the research and development expenses are direct costs expenses associated with the design and construction of the pilot demonstration system amounting to
$3.0 million during the period. There were no associated costs of this type in the nine months ended September 30, 2008.



Interest expense:Total interest expense (net of interest income) is $1.9 million for the nine months ended September 30, 2009 as compared
to $0.7 million for the nine months ended September 30, 2008. Interest expense on PetroAlgaes debt outstanding under its notes with PetroTech Holdings Corp (PetroTech Holdings Corp assumed the note from XL TechGroup in August 2008) and
Laurus/Valens decreased to $685,913 (or 0.95%) for the nine months ended September 30, 2009 from $719,500 for the nine months ended September 30, 2008. Commencing in August 2008, additional funding totaling $17.6 million has been advanced
by Laurus Master Fund Ltd ($417,512), and PetroTech Holdings Corp ($17.2 million), which has triggered an additional interest expense of $1,184,013 for the nine months ended September 30, 2009. Interest for both the notes are currently accrued.



---

Non-controlling interest

Due to changes in accounting pronouncements, the Company has begun, as of March 31, 2009, recording non-controlling party interest. The amount of loss
absorbed is $4,256,919 for the nine months ended September 30, 2009.

Liquidity and Capital Resources

At September 30, 2009, PetroAlgae had $0.7 million in cash down from $10.4 million at December 31, 2008. During the period
covered by this report the Company received an additional $7.0 million in debt financing from its principal shareholder.

Net cash used in
operating activities was $21.2 million and $7.4 million for the nine month periods ended September 30, 2009, and September 30, 2008, respectively. This was primarily attributed to the continued increase in expenditures used to fund
PetroAlgaes research and product development activities, design and construction of its pilot production facility, and to build its operational and business development efforts.

Net cash used in investing activities was $2.1 million and $0.6 million for the nine month periods ended September 30, 2009, and September 30, 2008, respectively. For the period covered
by this report, increased expenditures in construction of the pilot demonstration facility was $1,540,000, and $535,963 for general property and equipment. Spending for the pilot demonstration facility for the second half of 2009 will be
significantly less, however it is expected that there will be an increase in IT to support the continued development of the commercial information central processing center.

Net cash provided by financing activities was $13.5 million and $9.9 million for the nine month periods ended September 30, 2009 and September 30, 2008, respectively This resulted
principally from the proceeds of related party debt and sale of common shares in 2009 and the proceeds of related party debt in 2008.

PetroAlgaes contractual payment obligations as of September 30, 2009 are as follows:



|                               |  |       |        |                 |   |           |  |   |       
|------------------------------ |  | ----- | ------ | --------------- | - | --------- |  | - | ------
|                               |  | Total |        | Less than1 year |   | 1-3 years
|Operating lease for facilities |  | $     | 99,802 |                 | $ | 54,791    |  | $ | 45,011
|Total                          |  | $     | 99,802 |                 | $ | 54,791    |  | $ | 45,011

PetroAlgae has primarily financed its operations through loans and investments from its principal
shareholder and related entities. As of September 30, 2009, the principal outstanding balance on such loans was approximately $35 million, of which $17.6 million was in the form of demand loans bearing interest at 12% per annum and $17.4
million was outstanding at a floating rate of prime plus 2%. Currently, interest on all loans accumulates as additional principal or as accrued interest.

Summary of loan activity



|                                |  |                |            |                 |   |          
|------------------------------- |  | -------------- | ---------- | --------------- | - | ---------
|                                |  | Long-termnotes |            | AccruedInterest
|2007                            |  |                |            |                 |   |          
|Advances                        |  | $              | 8,527,812  |                 | $ |          
|Long term interest              |  |                | 379,982    |                 |   |         
|2008                            |  |                |            |                 |   |          
|Advances                        |  |                | 7,051,699  |                 |   |          
|Long term interest              |  |                | 961,749    |                 |   | 349,779  
|2009                            |  |                |            |                 |   |          
|Advances - through September 30 |  |                |           |                 |   |          
|Restructure - July 28           |  |                | 17,639,601 |                 |   |         
|Long term interest              |  |                | 690,704    |                 |   | 743,844  
|                                |  |                |            |                 |   |          
|Total                           |  | $              | 35,251,547 |                 | $ | 1,093,623
|                                |  |                |            |                 |   |          

The Company anticipates that it will receive initial license proceeds in 2009. The timing of these
initial fees will be conditional on the result of the PetroAlgae licensee achieving certain milestones with its sublicenses. While these fees will be meaningful, they will not be adequate to finance the Companys operations. We expect to
continue to incur substantial losses in 2009, and the amount and timing of our future losses or profitability are highly uncertain. Our ability to achieve and thereafter sustain profitability will be dependent upon, among other things, entering into
partner license agreements, actually receiving licensing fees under partner license agreements, and receiving royalty payments from such partner license agreements.



---

We will require substantial additional capital in order to continue our development and product
commercialization. While we believe that proceeds from recent investments combined with our current capital resources and customer license fees may be sufficient to meet our capital and operating requirements for the near term, we cannot assure you
that we will not require additional necessary financing. If needed, the Company may seek to raise additional capital through issuing additional equity or debt. Our funding requirements may significantly increase at any time due to technological
advances or competition from other companies. Our future capital requirements will also depend on numerous other factors, including scientific progress in our research and development programs, our ability to attract licensing fees from customers,
additional personnel costs, and the costs in filing and prosecuting patent applications and enforcing patent claims. We cannot assure you that adequate funding will be available to us or, if available, that it will be available on acceptable terms.
Any shortfall in funding could result in our having to curtail our research and development efforts, and cause us substantial difficulty in continuing to operate as a going concern.

PetroAlgae Inc. has never paid or declared dividends on its capital stock.

Critical Accounting Policies and Management Estimates

The SEC defines critical accounting policies as those that are,
in managements view, important to the portrayal of our financial condition and results of operations and demanding of managements judgment. Our discussion and analysis of financial condition and results of operation are based on
PetroAlgaes consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires PetroAlgae to make estimates on
experience and on various assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from those estimates.

PetroAlgaes critical accounting polices include:

Revenue Recognition

In
general, the Company records revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured.

Research and Development

Research and development expenditures, including direct and allocated overhead expenses, are charged to expense as incurred.

Long Lived Assets

The carrying value of long-lived assets is reviewed on a regular basis
for the existence of facts and circumstances that suggest impairment. Should there be impairment, the Company measures the amount of the impairment based on the amount that the carrying value of the impaired asset exceeds the discounted cash flows
expected to result from the use and eventual disposal from the impaired assets. There were no impairments in 2009 or 2008.

Equity-Based Compensation

The Accounting Standards Codification establishes fair value as the measurement objective in
accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement in accounting for share-based payment transactions with employees. The Statement also establishes fair value as the measurement
objective for transactions in which an entity acquires goods or services from non-employees in share-based payment transactions.

Income Taxes

The Company follows the Accounting Standards Codification for recording the provision for income taxes. Deferred
tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be
realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not
be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the
period of change.



PA LLC is organized as a limited liability
company under Delaware law. As a limited liability company that has elected to be taxed as a partnership, the Companys earnings pass through to the members and are taxed at the member level. Accordingly, no income tax provision has been
included in these financial statements for the operations related to PA LLC.



---

Recent Accounting Pronouncements

Accounting Standards Codification - In June, 2009, FASB established the FASB Accounting Standards Codification (ASC) as the single source of
authoritative GAAP. The ASC is a new structure which took existing accounting pronouncements and organized them by accounting topic. Relevant authoritative literature issued by the Securities and Exchange Commission (SEC) and select SEC
staff interpretations and administrative literature was also included in the ASC. All other accounting guidance not included in the ASC is non-authoritative. The ASC is effective for interim and annual reporting periods ending after September 15,
2009. The adoption of the ASC did not have an impact on the Companys consolidated financial position, results of operations or cash flows.

Subsequent Events - In May, 2009, the ASC guidance for subsequent events was updated to establish accounting and reporting standards for events that occur after the balance sheet date but before financial statements are issued or are
available to be issued. The update sets forth: (i) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial
statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet in its financial statements, and (iii) the disclosures that an entity should make about events or transactions
occurring after the balance sheet date in its financial statements. The new guidance requires the disclosure of the date through which subsequent events have been evaluated. The Company adopted the updated guidance in 2009. The adoption had no
impact on the Companys consolidated financial position, results of operations or cash flows.

Fair Value Accounting - In August 2009,
the ASC guidance for fair value measurements and disclosure was updated to further define fair value of liabilities. This update provides clarification for circumstances in which: (i) a quoted price in an active market for the identical liability is
not available, (ii) the liability has a restriction that prevents its transfer, and (iii) the identical liability is traded as an asset in an active market in which no adjustments to the quoted price of an asset are required. The updated guidance is
effective for the Companys interim reporting period beginning October 1, 2009. The Company is evaluating the potential impact of adopting this guidance on the Companys consolidated financial position, results of operations and cash
flows.

Variable Interest Entities - In June 2009, the ASC guidance for consolidation accounting was updated to require an entity to perform a
qualitative analysis to determine whether the enterprises variable interest gives it a controlling financial interest in a variable interest entity (VIE). This analysis identifies a primary beneficiary of a VIE as the entity that
has both of the following characteristics: (i) the power to direct the activities of a VIE that most significantly impact the entitys economic performance and (ii) the obligation to absorb losses or receive benefits from the entity that could
potentially be significant to the VIE. The updated guidance also requires ongoing reassessments of the primary beneficiary of a VIE. The updated guidance is effective for the Companys fiscal year beginning January 1, 2010. The Company
currently is evaluating the potential impact of adopting this guidance on the Companys consolidated financial position, results of operations and cash flows.

There were no other accounting standards and interpretations recently issued which are expected to a have a material impact on the Companys financial position, results of operations or cash flows.



---

|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

Interest Rate Risk

Our exposure to interest rate risk is related to our borrowings.
Fixed rate borrowings may have their fair market value adversely impacted from changes in interest rates. Floating rate borrowings will lead to additional interest expense if interest rates increase.

PetroAlgae enters into loan arrangements when needed. At September 30, 2009, the principal balance on the Companys
outstanding notes was $35.2 million, of which $17.6 million was outstanding at a floating rate of 2% over the prime interest rate and $17.6 million was outstanding at a fixed rate of 12%.

Our borrowings are subject to interest rate risk. Changes in the prime interest rate will have an effect on interest rate expense. Our financial instrument
holdings have been analyzed to determine their sensitivity to interest rate change. In this sensitivity analysis, we used a two hundred and fifty basis point parallel shift in the interest rate curve for all maturities and for all instruments; all
other factors were held constant. However, if there were a two hundred and fifty basis point increase in interest rates, the expected adverse impact to our financial statements would be immaterial.

Exchange Rate Risk

We are currently not subject to foreign exchange risk as a result of exposures to changes in currency exchange rates.

Commodity Price Risk

The result of deploying our technology, once commercialized, will be the creation of feedstock for
the fuel and animal feed markets which may directly or indirectly compete with existing commodities. Fuel (diesel or biodiesel) is a commodity whose price is determined based on in part the price of petroleum diesel, world demand, supply and other
factors, all of which are beyond our control. We expect that petroleum prices will continue to fluctuate in the future. Significant fluctuations in these commodity prices could impact the economic profitability of our products and services. However,
given that we are still at the development stage, we are currently not subject to commodity price risk.



---

|ITEM 4T. | CONTROLS AND PROCEDURES
|-------- | -----------------------

Disclosure Controls and Procedures

As of the end of the period covered by this report, we conducted an evaluation under
the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is
defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act).

Based on
this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports we file or submit under the
Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commissions rules and forms and that our disclosure and controls are designed to ensure that information required to
be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

During our most recent fiscal quarter, there has not occurred any change in our internal control over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



---

PART II - OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

Not applicable.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

We, or our potential
licensees, may be unable to deploy our system at scale.

To date, neither PetroAlgae nor its existing licensee has constructed a
facility utilizing PetroAlgaes proprietary system of growing and harvesting micro-crops on the commercial scale currently anticipated (i.e. 5000 hectares per Unit). Therefore, it has yet to be proven whether PetroAlgaes system may be
deployed on a full commercial scale or operate in a commercially feasible manner. Additionally, it is unknown whether the key performance metrics, such as (solely by way of example) growth and production rates, may be maintained at a full scale
commercial level. While PetroAlgae intends to be actively involved in the construction of the facilities by PetroAlgaes licensees, and only license its technology to potential licensees which it believes can effectively build and operate
facilities utilizing its system, such licensees may ultimately lack the expertise or the resources, or otherwise be unable, to do so.

We may be unable to acquire and/or retain licensees.

PetroAlgaes main source of revenue will be in the form of
licensing fees and royalties from its future licensees. Therefore, obtaining new licensees is critical for PetroAlgaes continued growth and operation. The risk remains PetroAlgae will be unable to acquire and/or retain licensees due to (solely
by way of example) the proposed licensing fees, royalties, capital expenditures or technical feasibility of the PetroAlgae micro-crop system. For example, the growth from the PetroAlgae micro-crop production system and the relevant processes and
methodologies being considered for operating the system may not yield a result that is commercially attractive to potential licensees (on a single unit cost compared to competitive products or otherwise), or to potential licensees in certain
targeted markets. Our micro-crop production system requires large fixed capital costs, which could render the system cost prohibitive for potential licensees, or potential licensees in certain target markets. While, on an on-going basis, we
continually work on cap-ex reduction analyses (particularly for the developed world), failure to secure licensees in a timely manner could have a material adverse effect on, or cause us to cease, our continued operations.

Our licensing methodology may not be accepted by potential licensees.

Our revenue projections are based on a model for licensing agreements which may not be accepted by our potential licensees. Specifically, without limitation, potential licensees may be unwilling to pay
the projected licensing fees prior to or during construction of the PetroAlgae system and/or full commercial deployment of such system. While one licensee has agreed to do so, it is unknown whether future licensees would be so willing, or even
whether the existing licensee will be able to fulfill its payment obligations. Therefore even if we are successful at attracting new licensees for our system, we may not realize revenue from such licensees in the form or time frame we currently
anticipate. Even if licensees execute licensing agreements in the form currently anticipated, there is no guarantee that such licensees will make payments in the time frame to which they may agree. If potential licensees are unwilling or unable to
pay as anticipated, the projected timing of our revenues and incoming cash flows could have a material adverse effect on, or cause us to cease, our continued operations.

Licensees who are or have been retained may be unable to perform their obligations to PetroAlgae.

PetroAlgaes main source of revenue will be in the form of licensing fees and royalties from its future licensees. Although PetroAlgae has signed its first licensing agreement, PetroAlgae has yet to
realize any revenue from such licensee, whether in the form of licensing fees, royalties or otherwise. If PetroAlgae does not begin to realize revenues from the licensee, or obtain new licensees, it may have a material adverse effect on our revenues
and results of operations, or cause us to cease operations altogether.

The market may not accept the products produced by our
micro-crop production system.

The biomass produced by our micro-crop production system produces two primary products, biomash
(feedstock) and protein. These products will be sold by licensees into existing markets and it is expected that oil prices and protein prices will fluctuate. If the prices were to drop significantly, this may have an effect on the licensees
expected profitability or their ability to secure end-customers. These products may also require industry and/or regulatory testing in the country in which they are produced and/or sold. This may have an effect on the licensees ability to secure end
customers and potentially, PetroAlgaes licensing fees and royalties. It has yet to be proven that potential buyers for specific products produced by our system, including without limitation refineries and feed companies, would ultimately
purchase these products produced by licensees of the PetroAlgae system. Failure to establish such a market or any significant reduction in a licensees profitability may result in failure to pay PetroAlgae the projected licensing fees and
royalties. Any of these may have a material adverse effect on our revenues and results of operations, or cause us to cease operations altogether.

We may not be able to rapidly switch our industry-focus.

Biofuel is a general term and comprises a wide
variety of technologies that could be considered green technologies. For the foreseeable future, we expect to be completely focused specifically on the production and marketing of micro-crops that produce a feedstock for the fuel
industry and proteins for the animal and human feed markets. Accordingly, an industry shift away from green feedstocks or the emergence of new competing products may reduce the demand for our products. The risk remains that we may be unable to shift
our business focus to other technologies/products rapidly to respond to any drastic shifts in the industry.

None of the directors of
the Company are independent directors.

All of the members of the board of directors of the Company have a direct or indirect material
financial relationship with the Company and are also currently either employed or engaged by the Company, PetroTech Holdings, or affiliates thereof. These relationships may interfere with the ability of the directors to exercise independent judgment
with respect to the Company and your investment therein.



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------

Refer to our Forms 8-K filed with the Securities and Exchange Commission on November 16, 2009, October 23, 2009, October 15, 2009, October 5, 2009, September 18,
2009, September 10, 2009, and September 3, 2009 for disclosure of private placement transactions exempt from the registration requirements of the Securities Act of 1933 pursuant to the exemption afforded by Section 4(2) thereof
and/or Regulation D promulgated thereunder.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------

Not
applicable.



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------

No matters were submitted to security holders of the Company during the period covered by this report.



|ITEM 5. | OTHER INFORMATION
|------- | -----------------

Not applicable.



---

EXHIBITS

These exhibits are available upon request. Requests should be directed to the Investor Relations Department at PetroAlgae Inc., 1901 S. Harbor City Blvd., Suite 300, Melbourne, FL 32901, telephone:
321-409-7272, email: investorrelations@petroalgae.com. The exhibit numbers preceded by an asterisk (*) indicate exhibits physically filed with this Form 10-Q. All other exhibit numbers indicate exhibits filed by incorporation by reference.



|       |  |                                                                                                                                                                                                                                                                                                                    
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       | 
|3.1    |  | Restated Certificate of Incorporation of PetroAlgae Inc. (incorporated by reference to Exhibit 3.1 to the registrants annual report on Form 10-K, filed March 31, 2009)                                                                                                                                           
|       | 
|3.2    |  | Restated Bylaws of PetroAlgae Inc. (incorporated by reference to Exhibit 3.2 to the registrants annual report on Form 10-K, filed March 31, 2009)                                                                                                                                                                 
|       | 
|*10.1  |  | Securities Purchase Agreement, dated October 19, 2009, with UBS AG                                                                                                                                                                                                                                                 
|       | 
|*10.2  |  | Warrant, dated October 26, 2009, with UBS AG                                                                                                                                                                                                                                                                       
|       | 
|*10.3  |  | Securities Purchase Agreement, dated October 9, 2009, with Green Alternative Energy USA, LLC                                                                                                                                                                                                                       
|       | 
|*10.4  |  | Warrant, dated October 9, 2009, with Green Alternative Energy USA, LLC                                                                                                                                                                                                                                             
|       | 
|*10.5  |  | Securities Purchase Agreement, dated October 9, 2009, with Valens U.S. SPV I, LLC                                                                                                                                                                                                                                  
|       | 
|*10.6  |  | Warrant, dated October 9, 2009, with Valens U.S. SPV I, LLC                                                                                                                                                                                                                                                        
|       | 
|*10.7  |  | Securities Purchase Agreement, dated October 9, 2009, with Valens Offshore SPV I, Ltd                                                                                                                                                                                                                              
|       | 
|*10.8  |  | Warrant, dated October 9, 2009, with Valens Offshore SPV Ltd                                                                                                                                                                                                                                                       
|       | 
|*10.9  |  | Securities Purchase Agreement, dated September 29, 2009, with Valens U.S. SPV I, LLC                                                                                                                                                                                                                               
|       | 
|*10.10 |  | Warrant, dated September 29, 2009, with Valens U.S. SPV I, LLC                                                                                                                                                                                                                                                     
|       | 
|*10.11 |  | Securities Purchase Agreement, dated September 29, 2009, with Valens Offshore SPV I, Ltd                                                                                                                                                                                                                           
|       | 
|*10.12 |  | Warrant, dated September 29, 2009, with Valens Offshore SPV I, Ltd                                                                                                                                                                                                                                                 
|       | 
|*10.13 |  | Securities Purchase Agreement, dated September 14, 2009, with Valens U.S. SPV I, LLC                                                                                                                                                                                                                               
|       | 
|*10.14 |  | Warrant, dated September 14, 2009, with Valens U.S. SPV I, LLC                                                                                                                                                                                                                                                     
|       | 
|*10.15 |  | Securities Purchase Agreement, dated September 14, 2009, with Valens Offshore SPV I, Ltd                                                                                                                                                                                                                           
|       | 
|*10.16 |  | Warrant, dated September 14, 2009, with Valens Offshore SPV I, Ltd                                                                                                                                                                                                                                                 
|       | 
|*10.17 |  | Securities Purchase Agreement, dated September 4, 2009, with Valens U.S. SPV I, LLC                                                                                                                                                                                                                                
|       | 
|*10.18 |  | Warrant, dated September 4, 2009, with Valens U.S. SPV I, LLC                                                                                                                                                                                                                                                      
|       | 
|*10.19 |  | Securities Purchase Agreement, dated September 4, 2009, with Valens Offshore SPV I, Ltd                                                                                                                                                                                                                            
|       | 
|*10.20 |  | Warrant, dated September 4, 2009, with Valens Offshore SPV I, Ltd                                                                                                                                                                                                                                                  
|       | 
|*10.21 |  | Securities Purchase Agreement, dated August 28, 2009, with Valens U.S. SPV I, LLC                                                                                                                                                                                                                                  
|       | 
|*10.22 |  | Warrant, dated August 28, 2009, with Valens U.S. SPV I, LLC                                                                                                                                                                                                                                                        
|       | 
|*10.23 |  | Securities Purchase Agreement, dated August 28, 2009, with Valens Offshore SPV I, Ltd                                                                                                                                                                                                                              
|       | 
|*10.24 |  | Warrant, dated August 28, 2009, with Valens Offshore SPV I, Ltd                                                                                                                                                                                                                                                    
|       | 
|10.25  |  | Amended and Restated Master Security Agreement, dated July 28, 2009, among PA LLC and PetroAlgae Inc. in favor of LV Administrative Services, Inc. for the benefit of PetroTech
Holdings Corp. (incorporated by reference to Exhibit 10.5 to the registrants quarterly report on Form 10-Q, filed August 14, 2009)
|       | 
|10.26  |  | Joinder Agreement, dated July 28, 2009, by PetroAlgae Inc. and PA LLC and delivered to LV Administrative Services, Inc., as administrative and collateral agent for PetroTech
Holdings Corp. (incorporated by reference to Exhibit 10.6 to the registrants quarterly report on Form 10-Q, filed August 14, 2009)  



---

|      |  |                                                                                                                                                                                                                                                                                                                                           
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.27 |  | Equity Pledge Agreement, dated July 28, 2009, among PetroAlgae Inc. and LV Administrative Services, Inc., as administrative and collateral agent for PetroTech Holdings Corp.
(incorporated by reference to Exhibit 10.7 to the registrants quarterly report on Form 10-Q, filed August 14, 2009)                                        
|      | 
|10.28 |  | Guaranty, dated July 28, 2009 (incorporated by reference to Exhibit 10.8 to the registrants quarterly report on Form 10-Q, filed August 14, 2009)                                                                                                                                                                                        
|      | 
|10.29 |  | Omnibus Amendment, Joinder and Reaffirmation Agreement, dated July 28, 2009, among PetroAlgae Inc., PA LLC and LV Administrative Services, as administrative and collateral agent for
Valens U.S. SPV I, LLC (incorporated by reference to Exhibit 10.9 to the registrants quarterly report on Form 10-Q, filed August 14, 2009)         
|      | 
|10.30 |  | Second Amended and Restated Term Note, dated July 28, 2009, in the principal amount of $417,511.92, issued by PA LLC to Valens U.S. SPV I, LLC (incorporated by reference to Exhibit
10.10 to the registrants quarterly report on Form 10-Q, filed August 14, 2009)                                                                      
|      | 
|10.31 |  | Amended and Restated Master Security Agreement, dated July 28, 2009, among PA LLC and PetroAlgae Inc. in favor of LV Administrative Services, Inc. for the benefit of Valens U.S. SPV
I, LLC (incorporated by reference to Exhibit 10.11 to the registrants quarterly report on Form 10-Q, filed August 14, 2009)                        
|      | 
|10.32 |  | Joinder Agreement, dated July 28, 2009, by PetroAlgae Inc., PA LLC and PetroTech Holdings Corp. and delivered to LV Administrative Services, Inc., as administrative and collateral
agent for Valens U.S. SPV I, LLC (incorporated by reference to Exhibit 10.12 to the registrants quarterly report on Form 10-Q, filed August 14, 2009)
|      | 
|*31.1 |  | Rule 13a-14(a) Certification of Principal Executive Officer                                                                                                                                                                                                                                                                               
|      | 
|*31.2 |  | Rule 13a-14(a) Certification of Principal Financial Officer                                                                                                                                                                                                                                                                               
|      | 
|*32.1 |  | Certification of Principal 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 |  | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                     



---

SIGNATURE

Pursuant to the requirements of the 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.



|                        |  |  |  |                 |  |                                                                                                      
|----------------------- |  |  |  | --------------- |  | -----------------------------------------------------------------------------------------------------
|                        |  |  |  | PETROALGAE INC.
|                        |  |  | 
|Date: November 16, 2009 |  |  |  | By:             |  | /s/    David Szostak                                                                                 
|                        |  |  |  | Name:           |  | David Szostak                                                                                        
|                        |  |  |  | Title:          |  | President (Principle Executive Officer, Principal Financial Officer and Principal Accounting Officer)