##### Table of Contents





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 March 31, 2010

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   ̈

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 May 13, 2010 was 106,829,480 shares of common stock, all of one class.









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##### Table of Contents

PETROALGAE INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2010

INDEX



|                                                                                                    |  |         
|--------------------------------------------------------------------------------------------------- |  | --------
|Form 10-Q Item Number                                                                               |  | Page No.
|PART I  FINANCIAL INFORMATION                                                                      |  | 1       
|Item 1. Financial Statements                                                                        |  | 1       
|Consolidated Balance Sheets as of March 31, 2010, and December 31, 2009                             |  | 1       
|Consolidated Statements of Operations for the Three Months ended March 31, 2010, and March 31, 2009 |  | 2       
|Consolidated Statements of Cash Flows for the Three Months ended March 31, 2010, and March 31, 2009 |  | 3       
|Notes to Consolidated Financial Statements                                                          |  | 4       
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations       |  | 13      
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                  |  | 17      
|Item 4. Controls and Procedures                                                                     |  | 18      
|                                                                                                    | 
|PART II  OTHER INFORMATION                                                                         |  | 19      
|Item 1. Legal Proceedings                                                                           |  | 19      
|Item 1A. Risk Factors                                                                               |  | 19      
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                                 |  | 19      
|Item 3. Defaults Upon Senior Securities                                                             |  | 19      
|Item 4. (Removed and Reserved)                                                                      |  | 19      
|Item 5. Other Information                                                                           |  | 19      
|Item 6. Exhibits                                                                                    |  | 20      
|                                                                                                    | 
|SIGNATURES                                                                                          |  | 21      



-i-



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##### Table of Contents

PART I - FINANCIAL INFORMATION



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

PetroAlgae Inc.

(A Development Stage Company)

Consolidated Balance Sheets

(Unaudited)



|                                                                                                                                           |  |                |             |   |                    |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------- | ----------- | - | ------------------ | - | ----------- | -
|                                                                                                                                           |  | March 31,2010* |             |   | December 31,2009** |  
|ASSETS                                                                                                                                     |  |                |             |   |                    |   |             |  
|Current assets:                                                                                                                            |  |                |             |   |                    |   |             |  
|Cash                                                                                                                                       |  | $              | 190,677     |   |                    | $ | 4,679,302   |  
|Restricted Cash                                                                                                                            |  |                | 2,000,000   |   |                    |   |            |  
|Prepaid expenses                                                                                                                           |  |                | 96,900      |   |                    |   | 129,333     |  
|                                                                                                                                           |  |                |             |   |                    |   |             |  
|Total current assets                                                                                                                       |  |                | 2,287,577   |   |                    |   | 4,808,635   |  
|                                                                                                                                           |  |                |             |   |                    |   |             |  
|Property and equipment                                                                                                                     |  |                | 4,034,088   |   |                    |   | 3,653,225   |  
|Accumulated depreciation                                                                                                                   |  |                | (1,675,055  | ) |                    |   | (1,416,350  | )
|                                                                                                                                           |  |                |             |   |                    |   |             |  
|Net property and equipment                                                                                                                 |  |                | 2,359,033   |   |                    |   | 2,236,875   |  
|                                                                                                                                           |  |                |             |   |                    |   |             |  
|Long-term deposits                                                                                                                         |  |                | 5,200       |   |                    |   | 5,200       |  
|                                                                                                                                           |  |                |             |   |                    |   |             |  
|Total assets                                                                                                                               |  | $              | 4,651,810   |   |                    | $ | 7,050,710   |  
|                                                                                                                                           |  |                |             |   |                    |   |             |  
|                                                                                                                                           |  |               
|LIABILITIES AND STOCKHOLDERS (DEFICIT)                                                                                                    |  |                |             |   |                    |   |             |  
|Current liabilities:                                                                                                                       |  |                |             |   |                    |   |             |  
|Accounts payable                                                                                                                           |  | $              | 727,738     |   |                    | $ | 536,328     |  
|Accrued expenses                                                                                                                           |  |                | 1,769,318   |   |                    |   | 1,617,191   |  
|Accrued expenses - related party                                                                                                           |  |                | 2,677,175   |   |                    |   | 2,144,840   |  
|Derivative liability                                                                                                                       |  |                | 7,500,000   |   |                    |   | 7,500,000   |  
|Deferred revenue                                                                                                                           |  |                | 3,500,000   |   |                    |   | 2,800,000   |  
|                                                                                                                                           |  |                |             |   |                    |   |             |  
|Total current liabilities                                                                                                                  |  |                | 16,174,231  |   |                    |   | 14,598,359  |  
|                                                                                                                                           |  |                |             |   |                    |   |             |  
|Note payable - related party                                                                                                               |  |                | 35,724,396  |   |                    |   | 35,489,096  |  
|Other long term liabilities                                                                                                                |  |                | 758,917     |   |                    |   | 758,917     |  
|                                                                                                                                           |  |                |             |   |                    |   |             |  
|Total liabilities                                                                                                                          |  |                | 52,657,544  |   |                    |   | 50,846,372  |  
|                                                                                                                                           |  |                |             |   |                    |   |             |  
|                                                                                                                                           |  |               
|Commitments and Contingencies                                                                                                              |  |                |             |   |                    |   |             |  
|                                                                                                                                           |  |               
|Stockholders (deficit):                                                                                                                    |  |                |             |   |                    |   |             |  
|Preferred stock - $.001 par value, 25,000,000 shares authorized, no shares issued or outstanding, 10,000,000 shares designated as
Series B |  |                |            |   |                    |   |            |  
|Common stock - $.001 par value, 300,000,000 shares authorized, 106,454,480 and 106,229,356 shares issued and
outstanding                   |  |                | 106,454     |   |                    |   | 106,229     |  
|Paid in capital                                                                                                                            |  |                | 25,163,272  |   |                    |   | 22,133,497  |  
|Deferred compensation                                                                                                                      |  |                | (1,137,500  | ) |                    |   | (1,531,250  | )
|Deficit accumulated during the development stage                                                                                           |  |                | (65,260,814 | ) |                    |   | (58,860,269 | )
|                                                                                                                                           |  |                |             |   |                    |   |             |  
|                                                                                                                                           |  |                | (41,128,588 | ) |                    |   | (38,151,793 | )
|Non-controlling interest                                                                                                                   |  |                | (6,877,146  | ) |                    |   | (5,643,869  | )
|                                                                                                                                           |  |                |             |   |                    |   |             |  
|Total stockholders (deficit) equity                                                                                                       |  |                | (48,005,734 | ) |                    |   | (43,795,662 | )
|                                                                                                                                           |  |                |             |   |                    |   |             |  
|Total liabilities and stockholders (deficit) equity                                                                                       |  | $              | 4,651,810   |   |                    | $ | 7,050,710   |  
|                                                                                                                                           |  |                |             |   |                    |   |             |  



|* | Unaudited
|- | ---------

|** | From audited financial statements
|-- | ---------------------------------

See the accompanying notes to the consolidated financial statements.



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##### Table of Contents

PetroAlgae Inc.

(A Development Stage Company)

Consolidated Statements of Operations

(Unaudited)



|                                            |  |                    |             |   |                                                                     |   |             |   |  |   |             |  
|------------------------------------------- |  | ------------------ | ----------- | - | ------------------------------------------------------------------- | - | ----------- | - |  | - | ----------- | -
|                                            |  | Three Months Ended |             |   | For
thePeriod FromSeptember 22,2006(Inception)ThroughMarch 
31,2010 |  
|                                            |  | March 31,2010      |             |   | March 31,2009                                                       |   |            
|                                            |  |                    |            
|Revenue                                     |  | $                  | 500,000     |   |                                                                     | $ |            |   |  | $ | 500,000     |  
|                                            |  |                    |             |   |                                                                     |   |             |   |  |   |             |  
|Costs and expenses:                         |  |                    |             |   |                                                                     |   |             |   |  |   |             |  
|General and administrative                  |  |                    | 2,300,203   |   |                                                                     |   | 2,952,100   |   |  |   | 19,886,293  |  
|General and administrative - related party  |  |                    |            |   |                                                                     |   |            |   |  |   | 3,023,739   |  
|Research and development                    |  |                    | 5,064,230   |   |                                                                     |   | 4,548,958   |   |  |   | 40,554,199  |  
|Research and development - related party    |  |                    |            |   |                                                                     |   |            |   |  |   | 1,130,975   |  
|Purchased research and development          |  |                    |            |   |                                                                     |   |            |   |  |   | 3,018,144   |  
|Interest expense - related party            |  |                    | 769,389     |   |                                                                     |   | 452,326     |   |  |   | 5,097,541   |  
|                                            |  |                    |             |   |                                                                     |   |             |   |  |   |             |  
|Total costs and expenses                    |  |                    | 8,133,822   |   |                                                                     |   | 7,953,384   |   |  |   | 72,710,891  |  
|                                            |  |                    |             |   |                                                                     |   |             |   |  |   |             |  
|Net loss before non-controlling interest    |  |                    | (7,633,822  | ) |                                                                     |   | (7,953,384  | ) |  |   | (72,210,891 | )
|                                            |  |                    |            
|Non-controlling interest                    |  |                    | 1,233,277   |   |                                                                     |   | 1,162,805   |   |  |   | 6,950,077   |  
|                                            |  |                    |             |   |                                                                     |   |             |   |  |   |             |  
|                                            |  |                    |            
|Net loss                                    |  | $                  | (6,400,545  | ) |                                                                     | $ | (6,790,579  | ) |  | $ | (65,260,814 | )
|                                            |  |                    |             |   |                                                                     |   |             |   |  |   |             |  
|                                            |  |                    |            
|Basic and diluted common shares outstanding |  |                    | 106,275,826 |   |                                                                     |   | 104,412,452 |   |  |   |             |  
|                                            |  |                    |             |   |                                                                     |   |             |   |  |   |             |  
|Basic and diluted loss per share            |  | $                  | (0.06       | ) |                                                                     | $ | (0.07       | ) |  |   |             |  
|                                            |  |                    |             |   |                                                                     |   |             |   |  |   |             |  

See the accompanying notes to the consolidated financial statements.



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PetroAlgae Inc.

(A Development Stage Company)

Consolidated Statements of Cash Flows

(Unaudited)



|                                                   |  |                    |            |   |                                                                     |   |            |   |  |   |             |  
|-------------------------------------------------- |  | ------------------ | ---------- | - | ------------------------------------------------------------------- | - | ---------- | - |  | - | ----------- | -
|                                                   |  | Three Months Ended |            |   | For thePeriod
FromSeptember 22,2006(Inception)ThroughMarch 
31,2010 |  
|                                                   |  | March 31,2010      |            |   | March 31,2009                                                       |   |           
|Operating Activities:                              |  |                    |            |   |                                                                     |   |            |   |  |   |             |  
|Net cash (used in) operating activities            |  | $                  | (6,757,761 | ) |                                                                     | $ | (5,813,574 | ) |  | $ | (48,630,817 | )
|                                                   |  |                    |            |   |                                                                     |   |            |   |  |   |             |  
|                                                   |  |                    |           
|Investing Activities:                              |  |                    |            |   |                                                                     |   |            |   |  |   |             |  
|Cash flows from investing activities:              |  |                    |            |   |                                                                     |   |            |   |  |   |             |  
|Acquisition of property and equipment              |  |                    | (380,864   | ) |                                                                     |   | (1,011,542 | ) |  |   | (4,011,639  | )
|                                                   |  |                    |            |   |                                                                     |   |            |   |  |   |             |  
|Net cash (used in) investing activities            |  |                    | (380,864   | ) |                                                                     |   | (1,011,542 | ) |  |   | (4,011,639  | )
|                                                   |  |                    |            |   |                                                                     |   |            |   |  |   |             |  
|                                                   |  |                    |           
|Financing Activities:                              |  |                    |            |   |                                                                     |   |            |   |  |   |             |  
|                                                   |  |                    |           
|Cash flows from financing activities:              |  |                    |            |   |                                                                     |   |            |   |  |   |             |  
|Proceeds from notes payable - related party        |  |                    |           |   |                                                                     |   |           |   |  |   | 28,194,601  |  
|Common shares issued for cash                      |  |                    | 2,650,000  |   |                                                                     |   |           |   |  |   | 24,638,532  |  
|                                                   |  |                    |            |   |                                                                     |   |            |   |  |   |             |  
|Net cash provided by financing activities          |  |                    | 2,650,000  |   |                                                                     |   |           |   |  |   | 52,833,133  |  
|                                                   |  |                    |            |   |                                                                     |   |            |   |  |   |             |  
|                                                   |  |                    |           
|Net decrease in cash                               |  |                    | (4,488,625 | ) |                                                                     |   | (6,825,116 | ) |  |   | 190,677     |  
|Cash - beginning of period                         |  |                    | 4,679,302  |   |                                                                     |   | 10,416,823 |   |  |   |            |  
|                                                   |  |                    |            |   |                                                                     |   |            |   |  |   |             |  
|Cash - end of period                               |  | $                  | 190,677    |   |                                                                     | $ | 3,591,707  |   |  | $ | 190,677     |  
|                                                   |  |                    |            |   |                                                                     |   |            |   |  |   |             |  
|                                                   |  |                    |           
|Non-cash Transactions:                             |  |                    |            |   |                                                                     |   |            |   |  |   |             |  
|                                                   |  |                    |           
|Reclassification of equity to derivative liability |  | $                  | 2,500,000  |   |                                                                     | $ |           |   |  | $ | 10,000,000  |  
|                                                   |  |                    |           
|Reclassification of derivative liability to equity |  | $                  | 2,500,000  |   |                                                                     |   |            |   |  |   | 2,500,000   |  
|Common shares issued for deferred services         |  | $                  |           |   |                                                                     | $ |           |   |  | $ | 3,150,000   |  

See the accompanying
notes to the consolidated financial statements.



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##### Table of Contents

PetroAlgae Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements

March 31, 2010

(Unaudited)

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, 2009 and 2008, and for the years then ended and the period from inception to December 31, 2009, 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.

Organization

PA LLC was formed on September 22, 2006 as a Delaware limited liability company to develop technologies to economically grow, harvest and process
micro-crops. The Companys primary business model is to license this technology to large customers who will commercially produce this biomass, which in turn is processed into two co-products 1) renewable fuel feedstock and 2) protein for animal
feed and potentially as a human supplement.

On December 16, 2008, Corporate Services International, a Delaware corporation, sold
9,000,000 shares of Series B preferred stock of PetroAlgae Inc. (then known by its prior name Dover Glen, Inc.) (the Company) and 10,000,000 shares of common stock of the Company 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 the Company 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 became the owner of 100,000,000 shares of common stock
of the Company, which, as of December 16, 2008, represented 99.9% of the total issued and outstanding common stock of the Company.

On
December 19, 2008, PetroTech Holdings assigned its entire interest in PA LLC (formerly PetroAlgae LLC), representing approximately 81.3% of the membership interests on a fully diluted basis of PA LLC, to the Company for no consideration. This
assignment had the effect of causing the Company 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 the Company.

As the former members of PA LLC controlled the Company 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 the Company, 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 the Company
retained an aggregate of 99,586 shares of common stock. The excess of the liabilities assumed over the assets received at the acquisition date of $67,712 has been reclassified as a reduction to equity.

The Company is currently in the development stage.

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.



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PetroAlgae Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements(Continued)

March 31, 2010

(Unaudited)



The Company has experienced significant losses from operations aggregating $65,260,814 since inception.
In addition, the Company had a working capital deficit at March 31, 2010, of $13,886,654 and has no significant revenue generating operations.

The Companys ability to continue as a going concern is contingent upon its ability to secure additional financing, attract equity investors, 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 a competitive business environment. Failure to
secure additional 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.

Principles of Consolidation

The consolidated financial statements presented herein include the accounts of the Company and its consolidated subsidiary PA LLC. As of March 31, 2010,
the Company owns approximately 82.22% of the membership interests on a fully diluted basis of PA LLC.

All intercompany transactions and
balances have been eliminated in consolidation.

Reclassifications

Certain amounts presented in the 2009 financial statements have been reclassified to conform to current year presentation.

Loss Per Share

Basic earnings (loss) per share are calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period.
Diluted earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares and dilutive common stock equivalents outstanding. During periods in which the Company incurs losses, common stock
equivalents are not considered as their effect would be anti-dilutive.



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##### Table of Contents

PetroAlgae Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements(Continued)

March 31, 2010

(Unaudited)



Note 2 Property and Equipment

Property and equipment and related accumulated depreciation and amortization at March 31, 2010, consist of:



|                                               |  |   |            |  
|---------------------------------------------- |  | - | ---------- | -
|Leasehold improvements                         |  | $ | 586,853    |  
|Furniture and fixtures                         |  |   | 81,716     |  
|Automobiles                                    |  |   | 62,641     |  
|Computer and office equipment                  |  |   | 225,520    |  
|Demonstration system and engineering equipment |  |   | 2,675,988  |  
|Software and networking                        |  |   | 401,370    |  
|                                               |  |   |            |  
|Total cost basis                               |  |   | 4,034,088  |  
|Less accumulated depreciation and amortization |  |   | (1,675,055 | )
|                                               |  |   |            |  
|Total Property and Equipment                   |  | $ | 2,359,033  |  
|                                               |  |   |            |  



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##### Table of Contents

PetroAlgae Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements(Continued)

March 31, 2010

(Unaudited)



Note 3 Notes Payable  Related Party

On July 24, 2009, the Company entered into agreements with Velens US and PetroTech Holdings Corp. to extend the maturity of all of the Companys
loans to July 24, 2012.

Notes payable consist of the following at March 31, 2010:



|                                                                                                                     |  |   |           
|-------------------------------------------------------------------------------------------------------------------- |  | - | ----------
|Note Payable to Valens US                                                                                            |  | $ | 417,512   
|     Interest accrues monthly, at 12% per annum                                                                     |  |   |           
|     Note is due on July 24, 2012                                                                                   |  |   |           
|                                                                                                                     | 
|Notes Payable to PetroTech Holdings Corp.                                                                            |  |   |           
|     Interest accrues monthly, at 12% per annum                                                                     |  |   |           
|     Notes are due on July 24, 2012                                                                                 |  |   | 17,222,089
|                                                                                                                     | 
|Note Payable to PetroTech Holdings Corp.                                                                             |  |   |           
|     Interest payable monthly, and is drawn into note on a monthly basis at Prime
+ 2% (5.25% at December 31, 2009) |  |   | 18,084,795
|     Note is due on July 24, 2012                                                                                   |  |   |           
|                                                                                                                     |  |   |           
|Notes Payable  Related Party                                                                                        |  | $ | 35,724,396
|                                                                                                                     |  |   |           

The notes are collectively secured by all of the Companys assets.

The $18,084,795 note payable was funded in 2007 and 2008 by XL TechGroup, Inc. In August 2008, the note held by XL TechGroup, Inc. was
acquired by PetroTech Holdings Corp. The balance of this note at December 31, 2009, was $17,849,495. At March 31, 2010, the note permits additional draws by the Company only to fund interest that accrued in the prior month. The maximum
balance of this note is limited to $25,000,000.

Interest charged to operations on these notes was $769,389, $452,326 and $5,097,541 during
the periods ended March 31, 2010 and 2009, and the period from September 22, 2006 (inception) to March 31, 2010.

Note 4
Stockholders (Deficit) Equity

As of March 31, 2010, the Company has authorized 300,000,000 shares of common stock and
25,000,000 shares of preferred stock, both classes having a $0.001 par value. Of the authorized preferred stock, 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.



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PetroAlgae Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements(Continued)

March 31, 2010

(Unaudited)



At September 22, 2006 (inception), 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 in 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, 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
$393,750, $1,575,000 and $43,750 was amortized during the first quarter of 2010, 2009 and 2008, respectively.

On January 15, 2009, 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 as
advance payment for certain planned 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. During February 2010, 106,126 of these shares were returned to the Company and cancelled because the extent of
EADs services to the Company was reduced.

During August through October 2009, the Company sold 1,437,500 units (consisting of one share
of common stock and a warrant to purchase a share of common stock at $15.00 for a period of 5 years) for $8.00 per unit ($5.43 per common share and $2.57 per warrant) or $11,500,000 as follows:



| |  | 562,500 units to an affiliate
|- |  | -----------------------------



| |  | 875,000 units to third parties
|- |  | ------------------------------

The units sold to third parties included an additional 875,000 warrants exercisable at $8.00 per share for a period of 6 months and 875,000 warrants
exercisable at $15.00 per share for a period of 6 months. These additional warrants expired in the first quarter of 2010 without being exercised.

The 562,500 units sold to the affiliate and 375,000 out of the 875,000 units sold to a third party contained share price and warrant exercise price
guarantees. 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 $7,500,000 of cash proceeds
received were allocated between the common stock and the warrants and the fair values of the common stock and warrants of $5,090,625 ($5.43 per share) and $2,409,375 ($2.57 per warrant), 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 its common stock, the fair value of the common stock was estimated at $5.43 per share based on the
conversion price of outstanding shares to a $10,000,000 note that was completed in 2009, 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. During the three months ending March 31, 2010, $2,500,000 was reclassified to equity.

During December
2009, the Company issued 357,143 units, each consisting of one share of common stock and a warrant to purchase a share of common stock at $15.00 for a period of 5 years, in exchange for a 30% interest in a start up entity.



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##### Table of Contents

PetroAlgae Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements(Continued)

March 31, 2010

(Unaudited)



The units were valued at $8.00 per unit, or $2,857,144 in the aggregate, which was the value at which the Company sold common shares and warrants during the period immediately preceding the
issuances discussed above. In addition the Company issued an additional 250,000 warrants exercisable at $8.00 per share for a period of 6 months and 250,000 warrants exercisable at $15.00 per share for a period of 6 months. These additional warrants
expire on June 30, 2010. The Company has used the Black-Scholes pricing model using the following assumptions to value these 500,000 additional warrants:

Volatility 82%, Dividend rate 0%, risk free interest rate 0.18%

The fair value of the options of $161,000 and the fair value of the units of $2,857,144 has been charged to operations as purchased research and
development.

During December 2009, the Company issued 9,467 shares of common stock in exchange for services. The shares had a stated value of
$8.00 per share and were valued for accounting purposes at $51,406 ($5.43 per share).

From January 1, 2010 to March 31, 2010, the
Company sold 331,250 units, each consisting of one share of common stock and a warrant to purchase a share of common stock at $15.00 for a period of 5 years, for $8.00 per unit ($5.43 per common share and $2.57 per warrant) or $2,650,000 as follows:



| |  |  | 312,500 units to an affiliate
| | - |  | -----------------------------



| |  |  | 18,750 units to third parties
| | - |  | -----------------------------

The 312,500 units sold to the affiliate contained share price and warrant exercise price guarantees. 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 will be accounted for as derivative instrument liabilities in accordance with ASC guidance. The cash proceeds received of $2,500,000 will be allocated between the common stock and
the warrants and the fair values of the common stock and warrants of $1,696,875 ($5.43 per share) and $803,125 ($2.57 per warrant), 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 its common stock, the fair value of the common stock was estimated at $5.43 share consistent with the assumption used for similar transactions in late 2009, 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.

Non-controlling Interest and PA LLC Equity Incentive Plan

As of March 31, 2010, non-controlling interest parties collectively owned approximately 18% of PA LLC, and have absorbed their respective portion of
the loss of PA LLC. The amount of loss absorbed was $5,643,869 for the year ended December 31, 2009 and $1,233,277 for the three months ended March 31, 2010. Prior to January 1, 2009, non-controlling interest parties absorbed $72,931
of the Companys net losses.

Stock Options

On June 17, 2009, the Company adopted the 2009 Equity Compensation Plan. The plan is intended to provide employees, consultants and others the
opportunity to receive equity awards, including incentive stock options. The plan is administered by the Board of Directors and is limited to an aggregate issuance of 4,000,000 shares of the Companys common stock. The exercise price shall be
equal to or greater than the fair value of the underlying common stock on the date the option is granted and its term shall not exceed ten years. Awards shall not vest in full prior to the third anniversary of the award date.



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##### Table of Contents

PetroAlgae Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements(Continued)

March 31, 2010

(Unaudited)



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 $4,818,000 and was calculated
using the following assumptions  term 10 years, risk-free interest rate based on constant maturity rates, an implicit volatility of 82%, and expected dividend yield 0%. The fair value will be charged to operations over the vesting period
commencing on July 1, 2009.

During January 2010, the Company granted an aggregate of 284,500 options, in the aggregate, to purchase
common shares at an exercise price of $8.00 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 $1,230,000 and was calculated using the following assumptions 
term 10 years, risk-free interest rate based on constant maturity rates, an implicit volatility of 82%, and expected dividend yield 0%. The fair value will be charged to operations over the vesting period commencing on January 1, 2010.

During the three months ended March 31, 2010, $380,000 was charged to operations related to these options.



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##### Table of Contents

PetroAlgae Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements(Continued)

March 31, 2010

(Unaudited)



A summary of stock option activity is as follows:



|                             |  |                 |  |                              |      |                          |   |     
|---------------------------- |  | --------------- |  | ---------------------------- | ---- | ------------------------ | - | ----
|                             |  | Number ofShares |  | WeightedAverageExercisePrice |      | WeightedAverageFairValue
|Balance at December 31, 2008 |  |                |  |                              |     |                          |   |    
|Granted June 2009            |  | 1,072,500       |  | $                            | 8.50 |                          | $ | 4.31
|Granted July 2009            |  | 45,000          |  | $                            | 8.00 |                          | $ | 4.34
|                             |  |                 |  |                              |      |                          |   |     
|Balance at December 31, 2009 |  | 1,117,500       |  | $                            | 8.48 |                          | $ | 4.33
|                             |  |                 |  |                              |      |                          |   |     
|Granted January 2010         |  | 284,500         |  | $                            | 8.00 |                          | $ | 4.34
|                             |  |                 |  |                              |      |                          |   |     
|Balance March 31, 2010       |  | 1,402,000       |  | $                            | 8.38 |                          | $ | 4.32
|                             |  |                 |  |                              |      |                          |   |     

The following table summarizes information about fixed-price stock options at March 31, 2010:



|               |  |                                  |  |                                |  |                              |     
|-------------- |  | -------------------------------- |  | ------------------------------ |  | ---------------------------- | ----
|               |  | Outstanding                     
|ExercisePrices |  | WeightedAverageNumberOutstanding |  | WeightedAverageContractualLife |  | WeightedAverageExercisePrice
|$8-8.50        |  | 1,402,000                        |  | 9.4 years                      |  | $                            | 8.38

None of the outstanding options are
exercisable at March 31, 2010.

As of March 31, 2010, the aggregate intrinsic value of all stock options outstanding and expected to
vest was $0.00 and the aggregate intrinsic value of currently exercisable stock options was $0.00. The intrinsic value of each option share is the difference between the fair market value of the common stock of $8.00 and the exercise price of such
option share to the extent it is in-the-money. Aggregate intrinsic value represents the value that would have been received by the holders of in-the-money options had they exercised their options on the last trading day of the year
and sold the underlying shares at the closing stock price on such day. The intrinsic value calculation is based on the price at which the Company has been selling common shares during 2009 and 2010. There were no in-the-money options
outstanding and exercisable as of March 31, 2010.

No stock options were exercised during the three months ending March 31, 2010.

The total fair value of options granted during the three months ended March 31, 2010, was $1,230,000. The total fair value of
option shares vested during the period ended March 31, 2010 was $0.00.

Note 5 License for Intellectual Property

During 2007, a minority member of PA LLC contributed licensed intellectual property to PA LLC in exchange for consideration having a fair value of
$2,334,639. The Company currently does not believe it will be able to commercially utilize this intellectual property and has expensed the entire purchase cost as research and development expense. However, the Company continues to report a long-term
liability totaling $758,917 for royalty payments and other costs that may be due in future periods related to this license.



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##### Table of Contents

PetroAlgae Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements(Continued)

March 31, 2010

(Unaudited)



Note 6 Licenses for Company Technology

In December 2009, the Company entered into a Master License Agreement with Congoo, LLC, a Delaware limited liability company, as licensee. Under this
license agreement, Congoo paid PA LLC an initial licensing fee of $4,000,000 for a royalty-bearing license to use PA LLCs proprietary technology to construct and operate facilities for the growth and harvesting of organisms for the production
of oil and biomass in Egypt and Morocco. Congoo is permitted to enter into sublicenses with prior written approval of PA LLC. For any facility that Congoo or any sublicense desires to construct and operate, Congoo must pay PA LLC a licensing fee and
a royalty. The license expires on December 31, 2010.

PA LLC and Congoo also entered into an Option Agreement on December 24, 2009
pursuant to which Congoo is given the option to sell to PA LLC, for a purchase price of $2,000,000, exercisable between June 15, 2010 and January 31, 2011, the right to market and directly license the Companys technology to certain
potential customers identified by Congoo in connection with the license agreement.

The Company has received the initial licensing fee of
$4,000,000 and has recorded the payment as deferred revenue. Because the $2,000,000 related to the option has been placed in escrow, and recorded by the Company as restricted cash, and the Company anticipates that it will pay $2,000,000 to Congoo
upon exercise of the option by the Company, it will amortize only $2,000,000 of the deferred revenue to license fee income over the term of the license. During the three months ended March 31, 2010, the Company recorded $500,000 in license
revenue related to this agreement.

Note 7 Subsequent Events

From January 1, 2010 to May 5, 2010, the Company sold 375,000 units consisting of one share of common stock and a warrant to purchase a share of common
stock at $15.00 for a period of 5 years for $8.00 per unit ($5.43 per common share and $2.57 per warrant) or $3,000,000 to affiliates.

The
units sold to the affiliates contained share price and warrant exercise price guarantees. 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 will be accounted for as derivative
instrument liabilities in accordance with ASC guidance. The cash proceeds received of $3,000,000 will be allocated between the common stock and the warrants and the fair values of the common stock and warrants of $2,036,250 ($5.43 per share) and
$963,750 ($2.57 per warrant), respectively, will be 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 its 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 remeasure the fair value of those 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 end will be reclassified to equity.



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##### Table of Contents

|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.

Unless the context requires otherwise, references in this Item 2 to we, us, our or the
Company refer collectively to PetroAlgae Inc. and its subsidiary.

Overview

The Company develops new technologies to economically grow, harvest and process micro-crops. The Companys primary business model is to license this
technology to large customers who will commercially produce this biomass, which in turn is separated into two co-products 1) renewable fuel feedstock and 2) protein for animal feed and potentially a human supplement. The renewable fuel product is
intended to be used as a direct feedstock to energy producers, including existing refineries. In the case of commercial refineries, this is expected to result in drop-in fuels such as diesel and jet fuel. When used in existing fermentation
facilities, it is expected to directly result in ethanol production. When used as a feedstock for other energy producers, particularly power generators, it is a renewable input source for co-firing with fossil fuels.

The Company believes that use of its proprietary technology will allow the user to achieve a greater level of productivity than can be realized with
other standard biomass growing techniques, and believes that this increased growth optimization is critical to the ability to produce products that can profitably be grown at commercial commodity scale without requiring subsidies.

In 2009, the Company completed a working demonstration facility in Florida showing the Companys technology, processes and yield, with two reactors
of commercial scale (approximately one hectare each). The growth reactors on this site are designed to be modular to support rapid deployment with a relatively high predictive cost and productivity. The processing segment of this facility
demonstrates the functionality of the required equipment used to process the harvested biomass into the products that the Companys customers could derive from their licensed systems. For certain segments of this facility the Company has
obtained independent audits and third-party verification for product composition, product applications and use, and facility yields. The Company expects more studies and audits will be conducted to further commercialization efforts.

The Company has incurred losses since inception of operations on June 22, 2006 and has an accumulated deficit of $65,260,814 as of March 31,
2010. The Companys losses have resulted principally from its continued research and business development expenses and construction of a multi-acre pilot demonstration system.

The Company is recognizing its first revenues in the three months ended March 31, 2010 of $500,000. These revenues are a result of fees it received in
December 2009. As a development stage company, we expect continued progress commercializing our proprietary technologies and we expect to continue to realize early customer fees. While we strive to maintain proper cost and spending controls, our
expenditures through the first quarter of 2010 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. It is managements
expectation that operating expenses will increase only modestly in 2010 to accommodate further activity in business development, commercial deployment and establishing infrastructure.

Results of operations for the three months ended March 31, 2010 compared to the three months ended March 31, 2009

Revenue

Total revenues were $500,000 for the three months ended March 31, 2010 as compared to none for the three months ended March 31, 2009. There
remains $3,500,000 of deferred revenues which is expected to be recognized in future periods.



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##### Table of Contents

Costs and expenses

The Companys total costs and expenses for the three months ended March 31, 2010 increased $0.1 million to $8.1 million, an increase of 2.3% as
compared to $8.0 million for the three months ended March 31, 2009.

General and administrative expenses: Total general and
administrative expenses decreased $0.7 million (or 22.1%) to $2.3 million for the three months ended March 31, 2010, as compared to $3.0 million for the three months ended March 31, 2009. General and administrative expenses include the
Companys public company costs, legal, general corporate overheads, and intellectual property management and decreased due to personnel reductions and other steps taken during the last year to reduce cash expenditures. 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 Business development expenses: Total research and business development expenses increased $0.5
million (or 11.3%) to $5 million for the three months ended March 31, 2010, as compared to $4.5 million for the three months ended March 31, 2009, reflecting greater expenditures to design, build and test the companys technology and
processes. 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.

Interest expense: Total interest expense (net of interest income) is $769,389 for the three months ended March 31, 2010, as compared to
$452,326 for the three months ended March 31, 2009. Interest expense on the Company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 increased $12,226 (or 5.5%) to $236,364 for the three months ended March 31, 2010 from $224,138 for the three months ended March 31, 2009. Commencing in August 2008, additional funding totaling $17.6 million has been advanced
by Valens U.S. SPV I, LLC ($417,512), and PetroTech Holdings Corp ($17.2 million), which has triggered an additional interest expense of $529,187 for the three months ended March 31, 2010. 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 $1,233,277 for the three months ended March 31, 2010.

Liquidity and Capital Resources

At March 31, 2010, the Company had $2,190,677 in cash and cash equivalents, including $2,000,000 of restricted cash.

Net cash used in operating activities was $6.8 million and $5.8 million for the three months ended March 31, 2010 and March 31, 2009,
respectively. This was primarily attributed to expenditures used to fund the Companys research and product development activities and building its operational and business development efforts.

Net cash used in investing activities or for the purchase of capital assets was $0.4 million and $1.0 million for the three months ended March 31,
2010 and March 31, 2009, respectively. The fluctuations from period to period are due to the continued growth and expansion including the purchase of capital assets.

Net cash provided by financing activities was $2.65 million and $0 for the three months ended March 31, 2010 and March 31, 2009, respectively.
The $2.65 million was raised from sale of common stock and warrants as discussed in more detail in note 4.

At March 31, 2010, the
Companys contractual obligations from continuing operations consist of :



|                               |  |                        |        |                 |   |           |  |           |   |                  |   |  |  
|------------------------------ |  | ---------------------- | ------ | --------------- | - | --------- |  | --------- | - | ---------------- | - |  | -
|                               |  | Payments due by period
|                               |  | Total                  |        | Less than1 year |   | 1-2 years |  | 3-5 years |   | More than5 years
|                               |  |                        |        |                 |  
|Operating lease for facilities |  | $                      | 86,426 |                 | $ | 86,426    |  | $         |  |                  |  |  | 
|                               |  |                        |        |                 |  
|Total                          |  | $                      | 86,426 |                 | $ | 86,426    |  | $         |  |                  |  |  | 



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##### Table of Contents

The Company has primarily financed its operations through loans and investments from its principal
shareholder that have resulted in aggregate cumulative proceeds of approximately $33.2 million through March 31, 2010.

Summary of loan activity



|                               |  |           |            |                  |   |          
|------------------------------ |  | --------- | ---------- | ---------------- | - | ---------
|                               |  | Principal |            | Accrued Interest
|2007                           |  |           |            |                  |   |          
|Advances                       |  | $         | 8,527,812  |                  | $ |         
|Long Term Interest             |  |           | 379,982    |                  |   |         
|                               |  |          
|2008                           |  |           |            |                  |   |          
|Advances                       |  |           | 7,051,699  |                  |   |         
|Long Term Interest             |  |           | 961,749    |                  |   | 379,982  
|                               |  |          
|2009                           |  |           |            |                  |   |          
|Advances                       |  |           |           |                  |   |         
|Maturity Extension - July 2012 |  |           | 17,639,601 |                  |   |         
|Long Term Interest             |  |           | 847,023    |                  |   | 1,690,116
|                               |  |          
|2010 - March 31, 2010          |  |           |            |                  |   |          
|Advances                       |  |           |           |                  |   |         
|Long Term Interest             |  |           | 316,5330   |                  |   | 534,089  
|                               |  |           |            |                  |   |          
|                               |  |          
|March 31, 2010 Balance         |  | $         | 35,724,396 |                  | $ | 2,604,187
|                               |  |           |            |                  |   |          

We expect to continue to incur losses in 2010. The amount and timing
of our future losses are highly uncertain. Our ability to achieve and thereafter sustain profitability will be dependent upon, among other things, entering into partner license agreements, and receiving milestone 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 current capital resources and anticipated cash flows from customer activities, 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. 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 business development programs, successful completion of our demonstration system, our ability to attract advance 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 business development efforts, and cause us substantial difficulty in continuing to operate as a going concern.

The Company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 Business Development

Research and business 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 2010 or 2009.

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.

Basis of Presentation

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.

The Company has experienced significant losses from operations aggregating $65,260,814 since
inception. In addition, the Company had a working capital deficit at March 31, 2010, of $13,886,654 and has no significant revenue generating operations.

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 a competitive business environment.

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 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.



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##### Table of Contents

Recent Accounting Pronouncements

The following Accounting Standards Codification Updates have been issued, or became effective, since the beginning of the current period
covered by these financial statements:



|                |  |               |  |                                                                                                                                                        
|--------------- |  | ------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|Pronouncement   |  | Issued        |  | Title                                                                                                                                                  
|                |  |              
|ASU No. 2010-01 |  | January 2010  |  | Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash - a consensus of the FASB Emerging Issues Task Force
|                |  |              
|ASU No. 2010-02 |  | January 2010  |  | Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary - a Scope Clarification                                 
|                |  |              
|ASU No. 2010-05 |  | January 2010  |  | Compensation - Stock Compensation (Topic 718): Escrowed Share Arrangements and the Presumption of Compensation                                         
|                |  |              
|ASU No. 2010-06 |  | January 2010  |  | Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements                                               
|                |  |              
|ASU No. 2010-09 |  | February 2010 |  | Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements                                                           
|                |  |              
|ASU No. 2010-11 |  | March 2010    |  | Derivatives and Hedging (Topic 815): Scope Exception Related to Embedded Credit Derivatives                                                            
|                |  |              
|ASU No. 2010-17 |  | April 2010    |  | Revenue Recognition - Milestone Method (Topic 605): Milestone Method of Revenue Recognition - a consensus of the FASB Emerging Issues Task Force       

Management does not believe that any recently issued, but not yet effective, accounting pronouncements, if adopted, would have a material effect on the
companys financial position, results of operations or liquidity.



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|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.

The Company enters into loan
arrangements when needed. At March 31, 2010, the principal balance on the Companys outstanding notes was $35.7 million, of which $18.1 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.



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##### Table of Contents

|ITEM 4. | 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.



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PART II - OTHER INFORMATION



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

Not applicable.



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

Information concerning
certain risks and uncertainties appears in Part I, Item IA Risk Factors of the Companys Annual Report on Form 10-K for the year ended December 31, 2009. You should carefully consider these risks and uncertainties before making
an investment decision with respect to shares of our common stock. Such risks and uncertainties could materially adversely affect our business, financial condition or operating results.

There have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009.



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



|1. | Current Report on Form 8-K, filed on March 5, 2010.
|-- | ---------------------------------------------------



|2. | Current Report on Form 8-K, filed on April 14, 2010.
|-- | ----------------------------------------------------



|3. | Current Report on Form 8-K, filed on May 11, 2010.
|-- | --------------------------------------------------

Each unregistered sale of equity securities disclosed in the Current Reports above was made in reliance upon an exemption from registration provided by
Section 4(2) under the Securities Act of 1933.



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

Not
applicable.



|ITEM 4. | (Removed and Reserved)
|------- | ----------------------



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

Not applicable.



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##### Table of Contents

|ITEM 6. | EXHIBITS
|------- | --------



|      |  |                                                                                                                                                                                                     
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.1   |  | Warrant, dated March 1, 2010, with Valens U.S. SPV I, LLC (incorporated by reference to Exhibit 4.2 to the registrants annual report on Form 10-K, filed March 31,
2010)                           
|      | 
|4.2   |  | Warrant, dated March 1, 2010, with Valens Offshore SPV Ltd (incorporated by reference to Exhibit 4.1 to the registrants annual report on Form 10-K, filed March 31,
2010)                          
|      | 
|4.3*  |  | Warrant, dated April 7, 2010, with Valens U.S. SPV I, LLC                                                                                                                                           
|      | 
|4.4*  |  | Warrant, dated April 7, 2010, with Valens Offshore SPV I, Ltd                                                                                                                                       
|      | 
|4.5*  |  | Warrant, dated May 5, 2010, with Valens U.S. SPV I, LLC                                                                                                                                             
|      | 
|4.6*  |  | Warrant, dated May 5, 2010, with Valens Offshore SPV I, Ltd                                                                                                                                         
|      | 
|10.1  |  | Securities Purchase Agreement, dated March 1, 2010, with Valens U.S. SPV I, LLC (incorporated by reference to Exhibit 10.2 to the registrants annual report on Form 10-K, filed
March 31, 2010)    
|      | 
|10.2  |  | Securities Purchase Agreement, dated March 1, 2010, with Valens Offshore SPV I, Ltd (incorporated by reference to Exhibit 10.3 to the registrants annual report on Form 10-K,
filed March 31, 2010)
|      | 
|10.3* |  | Securities Purchase Agreement, dated April 7, 2010, with Valens U.S. SPV I, LLC                                                                                                                     
|      | 
|10.4* |  | Securities Purchase Agreement, dated April 7, 2010, with Valens Offshore SPV I, Ltd                                                                                                                 
|      | 
|10.5* |  | Securities Purchase Agreement, dated May 5, 2010, with Valens U.S. SPV I, LLC                                                                                                                       
|      | 
|10.6* |  | Securities Purchase Agreement, dated May 5, 2010, with Valens Offshore SPV I, Ltd                                                                                                                   
|      | 
|31.1* |  | Rule 13a-14(a) Certification by the Principal Executive Officer                                                                                                                                     
|      | 
|31.2* |  | Rule 13a-14(a) Certification by the Principal Financial Officer                                                                                                                                     
|      | 
|32.1* |  | Certification by the 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 by the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                           

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.





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SIGNATURE

Pursuant to the requirements 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: May 17, 2010



By:

/S/    DAVID SZOSTAKName:

David SzostakTitle:

President(Principal Executive Officer, Principal Financial
Officer and Principal Accounting Officer)