U.S.
SECURITIES AND EXCHANGE COMMISSION




Washington,
D.C. 20549




FORM
10-KSB




(Mark
One)




[X]
            ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2007




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




Commission
file number 000-52361




BLUEFIRE
ETHANOL FUELS, INC.


(Name
of small business issuer in its charter)





NEVADA
            
            20-4590982(State
      or other jurisdiction of
              incorporation
      or organization)
            
            (I.R.S.
      Employer
              Identification
      No.)31
      MUSICK, IRVINE, CALIFORNIA
            
            92618(Address
      of principal executive offices)
            
            (Zip
      Code)




(Issuer’s
telephone number): (949) 588-3767




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




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




Common
Stock, $.001 par value




(Title
of Class)




Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act.  [  ]




Check
whether the issuer (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
[  ]




Check
if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [  ]




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




Issuers
revenues for its most recent fiscal year was $49,000.













The aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant on January 31, 2008 was
$25,015,312 based on a closing price of $3.945.  On January 31, 2008,
28,061,553 shares of the Company’s common stock, par value $.001 per share, were
outstanding.




Documents
Incorporated By Reference: None.




Transitional
Small Business Disclosure Format (check one): YES [  ] NO [X]













TABLE
OF CONTENTS




PART
      IITEM
      1.
            DESCRIPTION
      OF BUSINESS
            2ITEM
      2.
            DESCRIPTION
      OF PROPERTY
            8ITEM
      3.
            LEGAL
      PROCEEDINGS
            8ITEM
      4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
            9PART
      IIITEM
      5.
            MARKET
      FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
            10ITEM
      6.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
            11ITEM
      7.
            FINANCIAL
      STATEMENTS
            20ITEM
      8.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
            22ITEM
      8A.
            CONTROLS
      AND PROCEDURES
            22ITEM
      8A(T)
            MANAGEMENT'S
      ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
            22ITEM
      8B.
            OTHER
      INFORMATION
            23PART
      IIIITEM
      9.
            DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE;
      COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
            24ITEM
      10.
            EXECUTIVE
      COMPENSATION
            27ITEM
      11.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
            37ITEM
      12.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
            39ITEM
      13.
            EXHIBITS
            41ITEM
      14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
            41INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS
            F-1

















SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS




Included
in this Form 10-KSB are “forward-looking” statements, as well as historical
information. Although we believe that the expectations reflected in these
forward-looking statements are reasonable, we cannot assure you that the
expectations reflected in these forward-looking statements will prove to be
correct. Our actual results could differ materially from those anticipated in
forward-looking statements as a result of certain factors, including matters
described in the section titled “Risk Factors.” Forward-looking statements
include those that use forward-looking terminology, such as the words
“anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “project,”
“plan,” “will,” “shall,” “should,” and similar expressions, including when used
in the negative. Although we believe that the expectations reflected in these
forward-looking statements are reasonable and achievable, these statements
involve risks and uncertainties and we cannot assure you that actual results
will be consistent with these forward-looking statements. Important factors that
could cause our actual results, performance or achievements to differ from these
forward-looking statements include the following:




·
            the
      availability and adequacy of our cash flow to meet our
      requirements,




·
            economic,
      competitive, demographic, business and other conditions in our local and
      regional markets,




·
            changes
      or developments in laws, regulations or taxes in the ethanol or energy
      industries,




·
            actions
      taken or not taken by third-parties, including our suppliers and
      competitors, as well as legislative, regulatory, judicial and other
      governmental authorities,




·
            competition
      in the ethanol industry,




·
            the
      failure to obtain or loss of any license or
  permit,




·
            success
      of the Arkenol Technology,




·
            changes
      in our business and growth strategy (including our plant building strategy
      and co-location strategy), capital improvements or development
      plans,




·
            the
      availability of additional capital to support capital improvements and
      development, and




·
            other
      factors discussed under the section entitled “Risk Factors” or elsewhere
      in this registration statement.




All
forward-looking statements attributable to us are expressly qualified in their
entirety by these and other factors. We undertake no obligation to update or
revise these forward-looking statements, whether to reflect events or
circumstances after the date initially filed or published, to reflect the
occurrence of unanticipated events or otherwise.













PART
I




ITEM
1. DESCRIPTION OF BUSINESS




COMPANY
HISTORY




Our
Company




We
are BlueFire Ethanol Fuels, Inc., a Nevada corporation. Our goal is to develop,
own and operate high-value carbohydrate-based transportation fuel plants, or
biorefineries, to produce ethanol, a viable alternative to fossil fuels, and to
provide professional services to biorefineries worldwide. Our biorefineries will
convert widely available, inexpensive, organic materials such as agricultural
residues, high-content biomass crops, wood residues and cellulose from municipal
solid wastes into ethanol. This versatility enables us to consider a wide
variety of feedstocks and locations in which to develop facilities to become a
low cost producer of ethanol. We have licensed for use a patented process from
Arkenol, Inc., a Nevada corporation (“Arkenol”), to produce ethanol from
cellulose (the “Arkenol Technology”). We are the exclusive North America
licensee of the Arkenol Technology. We may also utilize certain biorefinery
related rights, assets, work-product, intellectual property and other know-how
related to 19 ethanol project opportunities originally developed by ARK Energy,
Inc, a Nevada corporation, to accelerate our deployment of the Arkenol
Technology.




Company
History




We
are a Nevada corporation that was initially organized as Atlanta Technology
Group, Inc., a Delaware corporation, on October 12, 1993. The Company was
re-named Docplus.net Corporation on December 31, 1998, and further re-named
Sucre Agricultural Corp. (“Sucre”) and re-domiciled as a Nevada corporation on
March 6, 2006.  Finally, on May 24, 2006, in anticipation of the
reverse merger by which it would acquire BlueFire Ethanol, Inc. (“BlueFire”), a
privately held Nevada corporation organized on March 28, 2006, as described
below, the Company was re-named to its current name BlueFire Ethanol Fuels,
Inc.




On
June 27, 2006, the Company completed a reverse merger (the “Reverse Merger”)
with BlueFire Ethanol, Inc. (“BlueFire Ethanol”).  At the time of
Reverse Merger, the Company was a blank-check company and had no operations,
revenues or liabilities. The only asset possessed by the Company was $690,000 in
cash which continued to be owned by the Company at the time of the Reverse
Merger. In connection with the Reverse Merger, the Company issued BlueFire
Ethanol 17,000,000 shares of common stock, approximately 85% of all of the
outstanding common stock of the Company, for all the issued and outstanding
BlueFire Ethanol common stock. The Company stockholders retained 4,028,264
shares of Company common stock.  As a result of the Reverse Merger,
BlueFire Ethanol became our wholly-owned subsidiary.  On June 21,
2006, prior to and in anticipation of the Reverse Merger, Sucre sold 3,000,000
shares of common stock to two related investors in a private offering of shares
pursuant to Rule 504 for proceeds of $1,000,000.




The
Company’s shares of common stock began trading under the symbol “BFRE.PK” on the
Pink Sheets of the National Quotation Bureau on July 11, 2006 and later began
trading on the OTCBB under the symbol “BFRE.OB” on June 19, 2007. On February
25, 2008, the closing price of our Common Stock was $3.60 per
share.




Our
executive offices are located at 31 Musick, Irvine, California 92618 and our
telephone number at such office is (949) 588-3767.




BUSINESS
OF ISSUER




PRINCIPAL
PRODUCTS OR SERVICES AND THEIR MARKETS




Our
goal is to develop, own and operate high-value carbohydrate-based transportation
fuel plants, or biorefineries, to produce ethanol, a viable alternative to
fossil fuels, and to provide professional services to biorefineries worldwide.
Our biorefineries will convert widely available, inexpensive, organic materials
such as agricultural residues, high-content biomass crops, wood residues and
cellulose from municipal solid wastes into ethanol. This versatility enables us
to consider a wide variety of feedstocks and locations in which to develop
facilities to become a low cost producer of ethanol.













We
have licensed for use the Arkenol Technology, a patented process from Arkenol to
produce ethanol from cellulose for sale into the transportation fuel market. We
are the exclusive North America licensee of the Arkenol Technology.




ARKENOL
TECHNOLOGY




The
production of chemicals by fermenting various sugars is a well-accepted science.
Its use ranges from producing beverage alcohol and fuel-ethanol to making citric
acid and xantham gum for food uses. However, the high price of sugar and the
relatively low cost of competing petroleum based fuel has kept the production of
chemicals mainly confined to producing ethanol from corn sugar.




In
the Arkenol Technology process, incoming biomass feedstocks are cleaned and
ground to reduce the particle size for the process equipment. The pretreated
material is then dried to a moisture content consistent with the acid
concentration requirements for breaking down the biomass, then hydrolyzed
(degrading the chemical bonds of the cellulose) to produce hexose and pentose
(C5 and C6) sugars at the high concentrations necessary for commercial
fermentation. The insoluble materials left are separated by filtering and
pressing into a cake and further processed into fuel for other beneficial uses.
The remaining acid-sugar solution is separated into its acid and sugar
components. The separated sulfuric acid is recirculated and reconcentrated to
the level required to breakdown the incoming biomass. The small quantity of acid
left in the sugar solution is neutralized with lime to make hydrated gypsum
which can be used as an agricultural soil conditioner. At this point the process
has produced a clean stream of mixed sugars (both C6 and C5) for fermentation.
In an ethanol production plant, naturally-occurring yeast, which Arkenol has
specifically cultured by a proprietary method to ferment the mixed sugar stream,
is mixed with nutrients and added to the sugar solution where it efficiently
converts both the C6 and C5 sugars to fermentation beer (an ethanol, yeast and
water mixture) and carbon dioxide. The yeast culture is separated from the
fermentation beer by a centrifuge and returned to the fermentation tanks for
reuse. Ethanol is separated from the now clear fermentation beer by conventional
distillation technology, dehydrated to 200 proof and denatured with unleaded
gasoline to produce the final fuel-grade ethanol product. The still bottoms,
containing principally water and unfermented sugar, is returned to the process
for economic water use and for further conversion of the sugars.




Simply
put, the process separates the biomass into two main constituents: cellulose and
hemicellulose (the main building blocks of plant life) and lignin (the “glue”
that holds the building blocks together), converts the cellulose and
hemicellulose to sugars, ferments them and purifies the fermentation liquids
into ethanol and other end-products.




ARK
ENERGY




BlueFire
may also utilize certain biorefinery related rights, assets, work-product,
intellectual property and other know-how related to nineteen (19) ethanol
project opportunities originally developed by ARK Energy, Inc,, a Nevada
corporation to accelerate BlueFire’s deployment of the Arkenol Technology. The
opportunities consist of ARK Energy’s previous relationships, analysis, site
development, permitting experience and market research on various potential
project locations within North America. ARK Energy has transferred these assets
to us and we  valued these business assets based on management’s best
estimates as to its actual costs of development. In the event we successfully
finance the construction of a project that utilizes any of the transferred
assets from ARK Energy, we are required to pay ARK Energy for the costs ARK
Energy incurred in the development of the assets pertaining to that particular
project or location. We did not incur the costs of a third party valuation but
based our valuation of the assets acquired by (i) an arms length review of the
value assigned by ARK Energy to the opportunities are based on the actual costs
it incurred in developing the project opportunities, and (ii) anticipated
financial benefits to us.




PILOT
PLANTS




From
1994-2000, a test pilot biorefinery plant was built and operated by Arkenol in
Orange, California to test the effectiveness of the Arkenol Technology using
several different types of raw materials containing cellulose. The types of
materials tested included: rice straw, wheat straw, green waste, wood wastes,
and municipal solid wastes. Various equipment for use in the process was also
tested and process conditions were verified leading to the issuance of the
certain patents in support of the Arkenol Technology.













In
2002, using the results obtained from the Arkenol California test pilot plant,
JGC Corporation, based in Japan, built and operated a bench scale facility
followed by another test pilot biorefinery plant in Izumi, Japan. At the Izumi
plant, Arkenol retained the rights to the Arkenol Technology while the
operations of the facility were controlled by JGC Corporation.




BIOREFINERY
PROJECTS




WE
ARE CURRENTLY IN THE DEVELOPMENT STAGE OF BUILDING BIOREFINERIES IN NORTH
AMERICA.




We
plan to use the Arkenol Technology and utilize JGC’s operations knowledge from
the Izumi test pilot plant to assist in the design and engineering of our
facilities in North America. JGC will provide the preliminary design package for
our first facility and work with our selected U.S. engineering company MECS
(formerly Monsanto) to complete the detailed engineering design of the plant.
This completed design should provide the blueprint for subsequent plant
constructions.




We
intend to build a facility that will process approximately 170 tons of green
waste material to produce roughly 3 million gallons of ethanol annually. In
connection therewith, on November 9, 2007, we purchased the facility site which
is located in Lancaster, California.  Permit applications were filed
on June 24, 2007, to allow for construction of the Lancaster facility. We are
currently in preliminary engineering. Although the cost of construction is not
readily determinable, we estimate the cost to be approximately $30 million for
this first plant. We are currently in discussions with potential sources of
financing for this facility but no definitive agreements are in
place.




We
are also developing a facility for construction in a joint effort with the
Department of Energy. This facility will use approximately 700 metric dry tons
of green waste and wood waste currently disposed in the landfill to produce
about 16.6 to 18 million gallons of ethanol annually. Preliminary engineering
design is in progress and permitting for this facility will commence once all
required preliminary engineering design is completed. A definitive agreement is
being finalized with Petro-Diamond, Inc. (“PDI”) for the purchase and sale of
the ethanol produced from the facility. PDI is a significant blender of
denatured ethanol into motor fuel in Southern California. We have received an
Award from the DOE of up to $40 million for the Facility. On or around October
4, 2007, we finalized Award 1 for a total approved budget of just under
$10,000,000 with the DOE. This award is a 60%/40% cost share, whereby 40% of
approve costs may be reimbursed by the DOE pursuant to the total $40 million
award announced in February 2007. The remainder of financing for this project is
yet to be determined.




The
Company is simultaneously researching and considering other suitable locations
for other similar biorefineries.




STATUS
OF PUBLICLY ANNOUNCED NEW PRODUCTS AND SERVICES




None.




DISTRIBUTION
METHODS OF THE PRODUCTS OR SERVICES




We
will utilize existing ethanol distribution channels to sell the ethanol that is
produced from our plants. For example, we have entered into a Letter of Intent
with PDI whereby PDI would purchase the ethanol produced by us in our 16.6
Million Gallon biomass-to-ethanol conversion facility upon its completion.
Ethanol is currently blended year-round at PDI’s terminal facility located in
Long Beach, California.




COMPETITIVE
BUSINESS CONDITIONS AND THE SMALL BUSINESS ISSUER’S COMPETITIVE POSITION IN THE
INDUSTRY AND METHODS OF COMPETITION




COMPETITION




Most
of the ethanol supply in the United States is derived from corn according to the
Renewable Fuels Association (“RFA”) website (HTTP://WWW.ETHANOLRFA.ORG/) and as
of December 18, 2007 is produced at approximately 140 facilities, ranging in
size from 300,000 to 110 million gallons per year, located predominately in the
corn belt in the Midwest. According to the RFA, about 14% of the current
production is by the Archer-Daniels-Midland Company with over 1 Billion gallons
annually and an additional 550 million gallons of capacity being
constructed/expanded currently.













Traditional
corn-based production techniques are mature and well entrenched in the
marketplace, and the entire industry’s infrastructure is geared toward corn as
the principal feedstock.




With
the Arkenol Technology the principle difference from traditional processes apart
from production technique is the acquisition and choice of feedstock. The use of
a non-commodity based non-food related biomass feedstock enables us to use
feedstock typically destined for disposal, i.e. wood waste, yard trimmings and
general green waste. All ethanol producers regardless of production technique
will fall subject to market fluctuation in the end product,
ethanol.




Due
to the feedstock variety we are able to process, we are able to locate
production facilities in and around the markets where the ethanol will be
consumed thereby giving us a competitive advantage against much larger
traditional producers who must locate plants near their feedstock, i.e. the corn
belt in the Midwest and ship the ethanol to the end market.




However,
in the area of biomass-to-ethanol production, there are few companies and no
commercial production infrastructure is built. As we continue to advance our
biomass technology platform, we are likely to encounter competition for the same
technologies from other companies that are also attempting to manufacture
ethanol from cellulosic biomass feedstocks.




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




INDUSTRY
OVERVIEW




On
December 19, 2007 President Bush signed into law the Energy Independence and
Security Act of 2007.  The act provides for an increase in the supply
of alternative fuel sources by setting a mandatory Renewable Fuel Standard (RFS)
requiring fuel producers to use at least 36 billion gallons of biofuel in 2022
16 billion gallon of which must come from cellulosic derived
fuel.  Additionally, the Act called for reducing U.S. demand for oil
by setting a national fuel economy standard of 35 miles per gallon by 2020 –
which will increase fuel economy standards by 40 percent and save billions of
gallons of fuel.




Historically,
producers and blenders had a choice of fuel additives to increase the oxygen
content of fuels. MTBE (methyl tertiary butyl ether), a petroleum-based
additive, was the most popular additive, accounting for up to 75% of the fuel
oxygenate market. However, in the United States, ethanol is replacing MTBE as a
common fuel additive. While both increase octane and reduce air pollution, MTBE
is a presumed carcinogen which contaminates ground water. It has already been
banned in California, New York, Illinois and 16 other states. Major oil
companies have voluntarily abandoned MTBE and it is scheduled to be phased out
under the Energy Policy Act. As MTBE is phased out, we expect demand for ethanol
as a fuel additive and fuel extender to rise. A blend of 5.5% or more of
ethanol, which does not contaminate ground water like MTBE, effectively complies
with U.S. Environmental Protection Agency requirements for reformulated
gasoline, which is mandated in most urban areas.




Ethanol
is a clean, high-octane, high-performance automotive fuel commonly blended in
gasoline to extend supplies and reduce emissions. In 2004, according to the
American Coalition for Ethanol, 3% of all United States gasoline was blended
with some percentage of ethanol. The most common blend is E10, which contains
10% ethanol and 90% gasoline. There is also growing federal government support
for E85, which is a blend of 85% ethanol and 15% gasoline.




Ethanol
is a renewable fuel produced by the fermentation of starches and sugars such as
those found in grains and other crops. Ethanol contains 35% oxygen by weight
and, when combined with gasoline, it acts as an oxygenate, artificially
introducing oxygen into gasoline and raising oxygen concentration in the
combustion mixture with air. As a result, the gasoline burns more completely and
releases less unburnt hydrocarbons, carbon monoxide and other harmful exhaust
emissions into the atmosphere. The use of ethanol as an automotive fuel is
commonly viewed as a way to reduce harmful automobile exhaust emissions. Ethanol
can also be blended with regular unleaded gasoline as an octane booster to
provide a mid-grade octane product which is commonly distributed as a premium
unleaded gasoline.













Studies
published by the Renewable Fuel Association indicate that approximately 5.0
billion gallons of ethanol was consumed in 2006 in the United States and every
automobile manufacturer approves and warrants the use of E10. Because the
ethanol molecule contains oxygen, it allows an automobile engine to more
completely combust fuel, resulting in fewer emissions and improved performance.
Fuel ethanol has an octane value of 113 compared to 87 for regular unleaded
gasoline. Domestic ethanol consumption has tripled in the last eight years, and
consumption increases in some foreign countries, such as Brazil, are even
greater in recent years. For instance, 40% of the automobiles in Brazil operate
on 100% ethanol, and others use a mixture of 22% ethanol and 78% gasoline. The
European Union and Japan also encourage and mandate the increased use of
ethanol.




For
every barrel of ethanol produced, the American Coalition for Ethanol estimates
that 1.2 barrels of petroleum are displaced at the refinery level, and that
since 1978, U.S. ethanol production has replaced over 14.0 billion gallons of
imported gasoline or crude oil. According to a Mississippi State University
Department of Agricultural Economics Staff Report in August 2003, a 10% ethanol
blend results in a 25% to 30% reduction in carbon monoxide emissions by making
combustion more complete. The same 10% blend lowers carbon dioxide emissions by
6% to 10%.




During
the last 20 years, ethanol production capacity in the United States has grown
from almost nothing to an estimated 6 billion gallons per year in 2007. In the
United States, ethanol is primarily made from starch crops, principally from the
starch fraction of corn. Consequently, the production plants are concentrated in
the grain belt of the Midwest, principally in Illinois, Iowa, Minnesota,
Nebraska and South Dakota.




In
the United States, there are two principal commercial applications for ethanol.
The first is as an oxygenate additive to gasoline to comply with clean air
regulations. The second is as a voluntary substitute for gasoline - this is a
purely economic choice by gasoline retailers who may make higher margins on
selling ethanol-blended gasoline, provided ethanol is available in the local
market. The U.S. gasoline market is currently approximately 150 billion gallons
annually, so the potential market for ethanol (assuming only a 10% blend) is 15
billion gallons per year. Increasingly, motor manufacturers are producing
flexible fuel vehicles (particularly sports utility vehicle models) which can
run off ethanol blends of up to 85% (known as E85) in order to obtain exemptions
from fleet fuel economy quotas. There are now in excess of 5 million flexible
fuel vehicles on the road in the United States and automakers will produce
several millions per year, offering further potential for significant growth in
ethanol demand.




CELLULOSE
TO ETHANOL PRODUCTION




In
a recent report, “Outlook For Biomass Ethanol Production Demand,” the U.S.
Energy Information Administration found that advancements in production
technology of ethanol from cellulose could reduce costs and result in production
increases of 40% to 160% by 2010. Biomass (cellulosic feedstocks) includes
agricultural waste, woody fibrous materials, forestry residues, waste paper,
municipal solid waste and most plant material. Like waste starches and sugars,
they are often available for relatively low cost, or are even free. However,
cellulosic feedstocks are more abundant, global and renewable in nature. These
waste streams, which would otherwise be abandoned, land-filled or incinerated,
exist in populated metropolitan areas where ethanol prices are
higher.




SOURCES
AND AVAILABILITY OF RAW MATERIALS




The
U.S. DOE and USDA in its April 2005 report “BIOMASS AS FEEDSTOCK FOR A BIOENERGY
AND BIOPRODUCTS INDUSTRY: THE TECHNICAL FEASIBILITY OF A BILLION-TON ANNUAL
SUPPLY” found that about one billion tons of cellulosic materials from
agricultural and forest residues are available to produce more than one-third of
the current U.S. demand for transportation fuels.




DEPENDENCE
ON ONE OR A FEW MAJOR CUSTOMERS




Currently,
we have no dependence on one or a few major customers, although we have entered
into a non-binding letter of intent with Petro-Diamond, Inc. to be our sole
purchaser of ethanol from our proposed 16.6 million gallon plant in Southern
California. We are negotiating definitive agreements but no definitive agreement
has been signed with Petro-Diamond as of yet. See “DISTRIBUTION METHODS OF THE
PRODUCTS OR SERVICES.”













PATENTS,
TRADEMARKS, LICENSES, FRANCHISES, CONCESSIONS, ROYALTY AGREEMENTS OR LABOR
CONTRACTS




On
March 1, 2006, we entered into a Technology License Agreement with Arkenol, for
use of the Arkenol Technology. Arkenol holds the following patents in relation
to the Arkenol Technology: 11 U.S. patents, 21 foreign patents, and one pending
foreign patent. According to the terms of the agreement, we were granted an
exclusive, non-transferable, North American license to use and to sub-license
the Arkenol technology. The Arkenol Technology, converts cellulose and waste
materials into ethanol and other high value chemicals. As consideration for the
grant of the license, we are required to make a one time payment of $1,000,000
at first project construction funding and for each plant make the following
payments: (1) royalty payment of 3% of the gross sales price for sales by us or
our sublicensees of all products produced from the use of the Arkenol Technology
(2) and a one time license fee of $40.00 per 1,000 gallons of production
capacity per plant. According to the terms of the agreement, we made a one time
exclusivity fee prepayment of $30,000 during the period ended December 31, 2006.
As of December 31, 2007, we have not become obligated to pay any of these
amounts. All sub-licenses issued by us will provide for payments of the license
fees and royalties due Arkenol.




NEED
FOR ANY GOVERNMENT APPROVAL OF PRINCIPAL PRODUCTS OR SERVICES




We
are not subject to any government oversight for our current operations other
than for corporate governance and taxes. However, the production facilities that
we will be constructing will be subject to various federal, state and local
environmental laws and regulations, including those relating to the discharge of
materials into the air, water and ground, the generation, storage, handling,
use, transportation and disposal of hazardous materials, and the health and
safety of our employees. In addition, some of these laws and regulations will
require our facilities to operate under permits that are subject to renewal or
modification. These laws, regulations and permits can often require expensive
pollution control equipment or operational changes to limit actual or potential
impacts to the environment. A violation of these laws and regulations or permit
conditions can result in substantial fines, natural resource damages, criminal
sanctions, permit revocations and/or facility shutdowns.




EFFECT
OF EXISTING OR PROBABLE GOVERNMENTAL REGULATIONS ON THE BUSINESS




Currently,
the federal government encourages the use of ethanol as a component in
oxygenated gasoline as a measure to protect the environment as a viable
renewable domestic fuel to reduce U.S. dependence on foreign oil.




The
ethanol industry is heavily dependent on several economic incentives to produce
ethanol, including federal ethanol supports. Ethanol sales have been favorably
affected by the Clean Air Act amendments of 1990, particularly the Federal
Oxygen Program which became effective November 1, 1992. The Federal Oxygen
Program requires the sale of oxygenated motor fuels during the winter months in
certain major metropolitan areas to reduce carbon monoxide pollution. Ethanol
use has increased due to a second Clean Air Act program, the Reformulated
Gasoline Program. This program became effective January 1, 1995, and requires
the sale of reformulated gasoline in nine major urban areas to reduce
pollutants, including those that contribute to ground level ozone, better known
as smog. Increasingly stricter EPA regulations are expected to increase the
number of metropolitan areas deemed in non-compliance with Clean Air Standards,
which could increase the demand for ethanol.




On
December 19, 2007 President Bush signed into law the Energy Independence and
Security Act of 2007.  The act provides for an increase in the supply
of alternative fuel sources by setting a mandatory Renewable Fuel Standard (RFS)
requiring fuel producers to use at least 36 billion gallons of biofuel in 2022
16 billion gallon of which must come from cellulosic derived
fuel.  Additionally, the Act called for reducing U.S. demand for oil
by setting a national fuel economy standard of 35 miles per gallon by 2020 –
which will increase fuel economy standards by 40 percent and save billions of
gallons of fuel.




The
use of ethanol as an oxygenate to blend with fuel to comply with federal
mandates also has been aided by federal tax policy. The Energy Tax Act of 1978
exempted ethanol blended gasoline from the federal gas tax as a means of
stimulating the development of a domestic ethanol industry and mitigating the
country’s dependence on foreign oil. As amended, the federal tax exemption
currently allows the market price of ethanol to compete with the price of
domestic gasoline.













On
October 22, 2004, President Bush signed H.R. 4520, which contained the
Volumetric Ethanol Excise Tax Credit (“VEETC”) and amended the federal excise
tax structure effective as of January 1, 2005. Currently, ethanol-blended fuel
is taxed at a lower rate than regular gasoline (13.2 cents on a 10% blend).
Under VEETC, the existing ethanol excise tax exemption is eliminated, thereby
allowing the full federal excise tax of 18.4 cents per gallon of gasoline to be
collected on all gasoline and allocated to the highway trust fund. This would
add approximately $1.4 billion to the highway trust fund revenue annually. The
bill created a new volumetric ethanol excise tax credit of 51 cents per gallon
of ethanol blended. Refiners and gasoline blenders would apply for this credit
on the same tax form as before only it would be a credit from general revenue,
not the highway trust fund. Based on volume, the VEETC is expected to allow much
greater refinery flexibility in blending ethanol.  VEETC is scheduled
to expire in 2010, if not extended by law.




ESTIMATE
OF THE AMOUNT SPENT DURING EACH OF THE LAST TWO FISCAL YEARS ON RESEARCH AND
DEVELOPMENT ACTIVITIES




For
the fiscal year ending 2006 (March 28, 2006 (Inception) to December 31, 2006),
we spent roughly $466,002 on project development costs.




For
the fiscal year ending  December 31, 2007, we spent approximately
$4,930,739 on project development costs.




To
date, project development costs include the research and development expenses
related to our future cellulose-to-ethanol production facilities.




COSTS
AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS (FEDERAL, STATE AND
LOCAL)




We
will be subject to extensive air, water and other environmental regulations and
we will have to obtain a number of environmental permits to construct and
operate our plants, including, air pollution construction permits, a pollutant
discharge elimination system general permit, storm water discharge permits, a
water withdrawal permit, and an alcohol fuel producer’s permit. In addition, we
may have to complete spill prevention control and countermeasures
plans.




The
production facilities that we will build are subject to oversight activities by
the federal, state, and local regulatory agencies. There is always a risk that
the federal agencies may enforce certain rules and regulations differently than
state environmental administrators. State or federal rules are subject to
change, and any such changes could result in greater regulatory burdens on plant
operations. We could also be subject to environmental or nuisance claims from
adjacent property owners or residents in the area arising from possible foul
smells or other air or water discharges from the plant.




NUMBER
OF TOTAL EMPLOYEES AND NUMBER OF FULL TIME EMPLOYEES




We
had 7 full time employees as of December 31, 2007 and 1 part time employee. None
of our employees are subject to a collective bargaining agreement, and we
believe that our relationship with our employees is good.




ITEM
2.  DESCRIPTION OF PROPERTY




We
lease approximately 6,425 square feet of furnished office space at 31 Musick,
Irvine, California 92618 from Jeong Yun Kim for $11,565 per month until April
30, 2008, and then thereafter on a month-to-month basis.




On
November 9, 2007, we issued a check in the amount of $96,851, towards the
purchase of the land for the Lancaster facility totaling a purchase price of
$109,108. The approximately 10 acre site is presently vacant and undisturbed
except to occasional use by off road vehicles.  The site is flat and
has no distinguishing characteristics and is adjacent to a solid waste landfill
at a site that minimizes visual access from outside the immediate
area.




ITEM
3.  LEGAL PROCEEDINGS




We
are not a party to any material legal proceedings nor are we aware of any
circumstance that may reasonably lead a third party to initiate material legal
proceedings against us.




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




None.











PART
II




ITEM
5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS




MARKET
INFORMATION




Our
shares of common stock began trading under the symbol “BFRE.PK” on the Pink
Sheets of the National Quotation Bureau on July 11, 2006 and later began trading
on the OTCBB under the symbol “BFRE.OB” on June 19, 2007.




The
following table sets forth the high and low trade information for our common
stock for each quarter since we completed the Reverse Merger and began trading
on July 11, 2006. The prices reflect inter-dealer quotations, do not include
retail mark-ups, markdowns or commissions and do not necessarily reflect actual
transactions.




Quarter
    ended
              
              Low Price
              
              
              High PriceSeptember 30,
      2006
              
              $
              1.35
              
              
              $
              6.80December 31,
      2006
              
              $
              1.47
              
              
              $
              4.00March 31,
      2007
              
              $
              3.99
              
              
              $
              7.70June 30,
    2007
              
              $
              5.40
              
              
              $
              7.15September 30,
      2007
              
              $
              3.30
              
              
              $
              6.40December 31,
      2007
              
              $
              3.15
              
              
              $
              5.01


HOLDERS




As
of January 31, 2008 a total of 28,061,553 shares of the Company’s common stock
are currently outstanding held by approximately 2,750 shareholders of
record.




DIVIDENDS




We
have not paid any dividends on our common stock and intend to retain any future
earnings to fund the development and growth of our
business.  Therefore, we do not anticipate paying dividends on our
common stock for the foreseeable future.  There are no restrictions on our
present ability to pay dividends to stockholders of our common stock, other than
those prescribed by Nevada law.




SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS




2006
INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN, AS AMENDED




In order to compensate our officers,
directors, employees and/or consultants, on December 14, 2006 our Board of
Directors approved and stockholders ratified by consent the 2006 Incentive and
Non-Statutory Stock Option Plan (the “Plan”).  The Plan has a total of
10,000,000 shares reserved for issuance.




On
October 16, 2007, the Board of Directors reviewed the Plan. As such, it
determined that the Plan was to be used as a comprehensive equity incentive
program for which the Board of Directors serves as the plan administrator and,
therefore, amended the Plan (the “Amended and Restated Plan”) to add the ability
to grant restricted stock awards.




Under
the Amended and Restated Plan, an eligible person in the Company’s service may
acquire a proprietary interest in the Company in the form of shares or an option
to purchase shares of the Company’s common stock. The amendment includes certain
previously granted restricted stock awards as having been issued under the
Amended and Restated Plan.




As
of December 31, 2007, we have issued the following stock options and grants
under the Amended and Restated Plan:













Equity
Compensation Plan Information




Plan
    category
            Number of securities to be issued
      upon exercise of outstanding options, warrants and rights and number of
      shares of restricted stock
            Weighted average exercise
      price of outstanding options, warrants and
      rights(2)
            Number of securities remaining
      available for future issuanceEquity compensation
      plans approved by security holders under the Amended and Restated
      Plan
            3,440,159
      (1)
            $2.48
            6,559,841Equity compensation
      not pursuant to a plan
            602,203(3)
            $3.88Total
            4,022,362




(1) Of this amount, 20,000 options have
been exercised.


(2) Excludes shares of restricted stock
issued under the Plan.


(3)Includes a warrant to
purchase 200,000 shares of its common stock at an exercise price of $5.00 per
share to a certain consultant issued by the Company on November 9, 2006, for
consulting services.




RECENT
SALES OF UNREGISTERED SECURITIES




None




ITEM
6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION




THE
FOLLOWING DISCUSSION OF OUR PLAN OF OPERATION SHOULD BE READ IN CONJUNCTION WITH
THE FINANCIAL STATEMENTS AND RELATED NOTES TO THE FINANCIAL STATEMENTS INCLUDED
ELSEWHERE IN THIS REGISTRATION STATEMENT. THIS DISCUSSION CONTAINS
FORWARD-LOOKING STATEMENTS THAT RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL
PERFORMANCE. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS THAT MAY CAUSE OUR ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE
OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, LEVELS OF
ACTIVITY, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY THESE
FORWARD-LOOKING STATEMENTS. THESE RISKS AND OTHER FACTORS INCLUDE, AMONG OTHERS,
THOSE LISTED UNDER “FORWARD-LOOKING STATEMENTS” AND “RISK FACTORS” AND THOSE
INCLUDED ELSEWHERE IN THIS REGISTRATION STATEMENT.




PLAN
OF OPERATION




We
plan to raise additional funds through joint venture partnerships, project debt
financings or through future sales of our common stock, until such time as our
revenues are sufficient to meet our cost structure, and ultimately achieve
profitable operations. There is no assurance that we will be successful in
raising additional capital or achieving profitable operations. Our consolidated
financial statements do not include any adjustments that might result from the
outcome of these uncertainties. We will need financing within 12 months to
execute our business plan.




We
have not developed our own proprietary technology but rather we are a licensee
of the Arkenol Technology and therefore have benefited from Arkenol’s research
and development efforts and cost expenditures.




Our
business will encompass development activities culminating in the construction
and long-term operation of ethanol production biorefineries.  As such,
we are currently in the development-stage of finding suitable locations and
deploying project opportunities for converting cellulose fractions of municipal
solid waste and other opportunistic feedstock into ethanol fuels.  We
do not plan to significantly increase our number of employees over the next 12
months.













For
the next 12 months, our Plan of Operations is as follows:




·
            Obtain
      additional operating capital from joint venture partnerships, debt
      financing or equity financing to fund our ongoing operations and the
      development of initial biorefineries in North
  America.




·
            The
      Energy Policy Act of 2005 provides for grants and loan guarantee programs
      to incentivize the growth of the cellulosic ethanol market. These programs
      include a Cellulosic Biomass Ethanol and Municipal Solid Waste Guarantee
      Program under which the U.S. Department of Energy (“DOE”) could provide
      loan guarantees up to $250 million per qualified project. We have received
      approval of its pre-application and must now submit a formal application
      for a loan guarantee of up to $200 million to support the development of a
      55 million gallon per year project in California to be located adjacent to
      an existing biomass power plant.




·
            The
      Energy Policy Act of 2005 created a Biorefinery Demonstration Project
      Program under which $384 million or another amount appropriated by
      Congress is available to fund up to three biorefinery demonstration
      projects.  Ultimately the DOE was appropriated $385 million for
      the program and granted awards of various size to six companies of which
      we are one. In October, 2007, we signed the contract for the first phase
      of the grant program referred to by the DOE as “Award 1” for
      pre-construction activities on our El Sobrante
  project.




·
            As
      available and as applicable to our business plans, applications for public
      funding will be submitted to leverage private capital raised by
      us.




Our
initial planned projects in North America are projected as follows:




·
            A
      facility that will process approximately 170 tons of green waste material
      to produce roughly 3 million gallons of ethanol annually.  On
      November 9, 2007, we purchased the facility site which is located in
      Lancaster, California.  Permit applications were filed on
      June 24, 2007 to allow for construction of the Lancaster
      facility.  We are currently in preliminary engineering. Although
      the cost of construction is not readily determinable, we estimate the cost
      to be approximately $30 million for this first plant.  We are
      currently in discussions with potential sources of financing for this
      facility but no definitive agreements are in
  place.




·
            A
      facility proposed for development and construction at the El Sobrante
      Landfill located in Corona, California. This facility will use
      approximately 700 metric dry tons of green waste and wood waste currently
      disposed in the landfill to produce about 16.6 to 18 million gallons of
      ethanol annually. Preliminary engineering design is in progress and
      permitting for this facility will commence once all required preliminary
      engineering design is completed. A definitive agreement is being finalized
      with Petro-Diamond for the purchase and sale of the ethanol produced from
      the facility.  We have received an Award from the DOE of up to
      $40 million for the El Sobrante Facility.  On or around October
      4, 2007, we finalized Award 1 for a total approved budget of just under
      $10,000,000 with the DOE.  This award is a 60%/40% cost share,
      whereby 40% of approved costs may be reimbursed by the DOE pursuant to the
      total $40 million award amount in February 2007.  The remainder
      of financing for this project is yet to be
  determined.




·
            Several
      other opportunities are being evaluated by us in North America but no
      definitive plans have been made.  Discussions with various
      landfill owners are underway to duplicate the proposed development at the
      El Sobrante landfill although no definitive agreements have been
      reached.




LIQUIDITY AND CAPITAL RESOURCES




Historically,
we have funded our operations through financing activities consisting primarily
of private placements of debt and equity securities with existing shareholders
and outside investors. Our principal use of funds has been for the further
development of our Biorefinery Projects, for capital expenditures and general
corporate expenses.




During
the twelve months ended December 31, 2007, proceeds of approximately $17,394,500
were received from the sale of securities in connection with various private
placements. Additional proceeds of $40,000 were received from the exercise of
stock options.













In
addition, as our Projects develop to the point of construction, we anticipate
significant purchases of long lead time item equipment for construction. As of
December 31, 2007, we had cash and cash equivalents of approximately $13.0
million after paying off a related party revolving line of credit of
approximately $631,000 which included accrued interest of approximately
$37,800.




We
expect to rely upon funds raised from this recent private placement, as well as
future equity and debt offerings to implement our growth plan and meet our
liquidity needs going forward.  Management believes that our Company’s
cash will be sufficient to meet our working capital requirements for the next
twelve month period, as well as be sufficient to prepare our first two Projects
for construction, at which point further funding will be necessary. However, we
cannot assure you that such financing will be available to us on favorable
terms, or at all. If, after utilizing the existing sources of capital available
to the Company, further capital needs are identified and we are not successful
in obtaining the financing, we may be forced to curtail our existing or planned
future operations.




CRITICAL
ACCOUNTING POLICIES




We
prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America. The preparation
of these financial statements require the use of estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Our
management periodically evaluates the estimates and judgments made. Management
bases its estimates and judgments on historical experience and on various
factors that are believed to be reasonable under the circumstances. Actual
results may differ from these estimates as a result of different assumptions or
conditions.




The
methods, estimates, and judgment we use in applying our most critical accounting
policies have a significant impact on the results we report in our financial
statements. The SEC has defined “critical accounting policies” as those
accounting policies that are most important to the portrayal of our financial
condition and results, and require us to make our most difficult and subjective
judgments, often as a result of the need to make estimates of matters that are
inherently uncertain. Based upon this definition, our most critical estimates
are described below under the heading “Revenue Recognition.” We also have other
key accounting estimates and policies, but we believe that these other policies
either do not generally require us to make estimates and judgments that are as
difficult or as subjective, or it is less likely that they would have a material
impact on our reported results of operations for a given period. For additional
information see Note 1, “Summary of Organization and Significant Accounting
Policies” in the notes to our audited financial statements appearing elsewhere
in this report. Although we believe that our estimates and assumptions are
reasonable, they are based upon information presently available, and actual
results may differ significantly from these estimates.




CASH
AND CASH EQUIVALENTS




For
purpose of the statement of cash flows, we consider all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents.




REVENUE
RECOGNITION




We
are currently a developmental-stage company and have recognized minimal revenues
to date. We will recognize revenues from 1) consulting services rendered to
potential sub licensees for development and construction of cellulose to ethanol
projects, 2) sales of ethanol from our production facilities when (a) persuasive
evidence that an agreement exists; (b) the products have been delivered; (c) the
prices are fixed and determinable and not subject to refund or adjustment; and
(d) collection of the amounts due is reasonably assured.




PROJECT
DEVELOPMENT




Project
development costs are either expensed or capitalized. The costs of materials and
equipment that will be acquired or constructed for project development
activities, and that have alternative future uses, both in project development,
marketing or sales, will be classified as property and equipment and depreciated
over their estimated useful lives. To date, project development costs include
the research and development expenses related to our future cellulose-to-ethanol
production
facilities.  During the twelve months ended December 31, 2007, we
expensed all costs related to the facility development.















INCOME
TAXES




The
Company accounts for income taxes in accordance with FASB Statement No. 109
“Accounting for Income Taxes.” SFAS No. 109 requires the Company to provide a
net deferred tax asset/liability equal to the expected future tax
benefit/expense of temporary reporting differences between book and tax
accounting methods and any available operating loss or tax credit carry
forwards.  We provide a valuation allowance to net deferred tax assets
when it is deemed unlikely that we will recover such deferred tax
assets.




FAIR
VALUE OF FINANCIAL INSTRUMENTS




The
fair value of financial instruments approximated their carrying values at
December 31, 2007. The financial instruments consist of cash and accounts
payable.




LOSS
PER COMMON SHARE




The
Company presents basic loss per share (“EPS”) and diluted EPS on the face of the
consolidated statement of operations. Basic loss per share is computed as net
loss divided by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur from common
shares issuable through stock options, warrants, and other convertible
securities.  As of December 31, 2007, the Company had options and
warrants to purchase an aggregate of 10,673,853 shares of common stock that were
excluded from the calculation of diluted loss per share as their effects would
have been anti-dilutive.




CONCENTRATIONS
OF CREDIT RISK




The
Company, at times, maintains cash balances at certain financial institutions in
excess of amounts insured by federal agencies.




RECENT
ACCOUNTING PRONOUNCEMENTS




SHARE-BASED
PAYMENT




In
December 2004, the FASB issued a revision of SFAS 123 (“SFAS 123(R)”) that
requires compensation costs related to share-based payment transactions to be
recognized in the statement of operations. With limited exceptions, the amount
of compensation cost will be measured based on the grant-date fair value of the
equity or liability instruments issued. In addition, liability awards will be
re-measured each reporting period. Compensation cost will be recognized over the
period that an employee provides service in exchange for the award. SFAS 123(R)
replaces SFAS 123 and was effective as of the first interim period beginning
after January 1, 2006. During the period ended December 31, 2006, the Company
adopted the provisions of SFAS 123(R).  No options were outstanding
prior to adoption.




In
July 2006, the FASB issued FASB Interpretation No.48, “Accounting for
Uncertainty in Income Taxes” (“FIN 48”) which clarifies the accounting for
uncertainty in income taxes recognized in the financial statements in accordance
with FASB Statement No. 109, “Accounting for Income Taxes”. This pronouncement
recommends a recognition threshold and measurement process for recording in the
financial statements uncertain tax positions taken or expected to be taken in
the Company’s tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods and
disclosure requirements for uncertain tax positions. The accounting provisions
of FIN 48 will be effective for the Company beginning January 1, 2007. The
Company is in the process of evaluating the impact, if any, the adoption of FIN
48 will have on its financial statements.




In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS
157 defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. This statement clarifies fair
value as permitted under other accounting pronouncements but does not require
any new fair value measurements. However, for some entities, the application of
this statement will change current practice. The Company will be required to
adopt
SFAS No. 157 as of January 1, 2008 and is currently in the process of evaluating
the impact, if any, the adoption of SFAS No. 157 will have on its financial
statements.















OFF-BALANCE
SHEET ARRANGEMENTS




There
are no off-balance sheet arrangements.




RISK
FACTORS




This
registration statement contains forward-looking statements that involve risks
and uncertainties. These statements can be identified by the use of
forward-looking terminology such as “believes,” “expects,” “intends,” “plans,”
“may,” “will,” “should,” or “anticipation” or the negative thereof or other
variations thereon or comparable terminology. Actual results could differ
materially from those discussed in the forward-looking statements as a result of
certain factors, including those set forth below and elsewhere in this
Registration Statement. The following risk factors should be considered
carefully in addition to the other information in this Registration Statement,
before purchasing any of the Company’s securities.




RISKS
RELATED TO OUR BUSINESS AND INDUSTRY




We
have had limited operations and have incurred net losses of $15,831,915 for the
period from March 28, 2006 (Inception) through December 31, 2007, of which
$4,451,145 was cash used in our operating activities, and have generated minimal
revenues from consulting and no revenues from operations. We have yet to begin
ethanol production or construction of ethanol producing plants. Since the
Reverse Merger, we have been engaged in organizational activities, including
developing a strategic operating plan, plant engineering and development
activities, entering into contracts, hiring personnel, developing processing
technology, and raising private capital. Our continued existence is dependent
upon our ability to obtain additional debt and/or equity financing. We
anticipate beginning construction of a plant within the next 6 months and expect
to complete the project and to begin production of ethanol within the next 24
months. Although the cost of construction is not readily determinable, we
estimate the cost of our first facility to be approximately $30
million.  We plan to raise additional funds through project financings
or through future sales of our common stock, until such time as our revenues are
sufficient to meet our cost structure, and ultimately achieve profitable
operations. There is no assurance we will be successful in raising additional
capital or achieving profitable operations. Wherever possible, our Board of
Directors will attempt to use non-cash consideration to satisfy obligations. In
many instances, we believe that the non-cash consideration will consist of
restricted shares of our common stock. These actions will result in dilution of
the ownership interests of existing shareholders may further dilute common stock
book value, and that dilution may be material.




OUR
CELLULOSE-TO-ETHANOL TECHNOLOGIES ARE UNPROVEN ON A LARGE-SCALE COMMERCIAL BASIS
AND PERFORMANCE COULD FAIL TO MEET PROJECTIONS, WHICH COULD HAVE A DETRIMENTAL
EFFECT ON THE LONG-TERM CAPITAL APPRECIATION OF OUR STOCK.




While
production of ethanol from corn, sugars and starches is a mature technology,
newer technologies for production of ethanol from cellulose biomass have not
been built at large commercial scales. The technologies being utilized by us for
ethanol production from biomass have not been demonstrated on a commercial
scale. All of the tests conducted to date by us with respect to the Arkenol
Technology have been performed on limited quantities of feedstocks, and we
cannot assure you that the same or similar results could be obtained at
competitive costs on a large-scale commercial basis. We have never utilized
these technologies under the conditions or in the volumes that will be required
to be profitable and cannot predict all of the difficulties that may arise. It
is possible that the technologies, when used, may require further research,
development, design and testing prior to larger-scale commercialization.
Accordingly, we cannot assure you that these technologies will perform
successfully on a large-scale commercial basis or at all.




OUR
BUSINESS EMPLOYS LICENSED ARKENOL TECHNOLOGY WHICH MAY BE DIFFICULT TO PROTECT
AND MAY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF THIRD
PARTIES.




We
currently license our technology from Arkenol.  Arkenol owns 11 U.S.
patents, 21 foreign patents, and has one foreign patent pending and may file
more patent applications in the future. Our success depends, in part, on our
ability to use the Arkenol Technology, and for Arkenol to obtain patents,
maintain trade secrecy and not infringe the proprietary rights of third parties.
We cannot assure you that the patents of others will not have an adverse effect
on our ability to conduct our business,
that we will develop additional proprietary technology that is patentable or
that any patents issued to us or Arkenol will provide us with competitive
advantages or will not be challenged by third parties. Further, we cannot assure
you that others will not independently develop similar or superior technologies,
duplicate elements of the Arkenol Technology or design around
it.















It
is possible that we may need to acquire other licenses to, or to contest the
validity of, issued or pending patents or claims of third parties. We cannot
assure you that any license would be made available to us on acceptable terms,
if at all, or that we would prevail in any such contest. In addition, we could
incur substantial costs in defending ourselves in suits brought against us for
alleged infringement of another party’s patents in bringing patent infringement
suits against other parties based on our licensed patents.




In
addition to licensed patent protection, we also rely on trade secrets,
proprietary know-how and technology that we seek to protect, in part, by
confidentiality agreements with our prospective joint venture partners,
employees and consultants. We cannot assure you that these agreements will not
be breached, that we will have adequate remedies for any breach, or that our
trade secrets and proprietary know-how will not otherwise become known or be
independently discovered by others.




OUR
SUCCESS DEPENDS UPON ARNOLD KLANN, OUR CHAIRMAN AND CHIEF EXECUTIVE OFFICER, AND
JOHN CUZENS, OUR CHIEF TECHNOLOGY OFFICER AND SENIOR VICE
PRESIDENT.




We
believe that our success will depend to a significant extent upon the efforts
and abilities of (i) Arnold Klann, our Chairman and Chief Executive Officer, due
to his contacts in the ethanol and cellulose industries and his overall insight
into our business, and (ii) John Cuzens, our Chief Technology Officer and Senior
Vice President for his technical and engineering expertise, including his
familiarity with the Arkenol Technology. Our failure to retain Mr. Klann or Mr.
Cuzens, or to attract and retain additional qualified personnel, could adversely
affect our operations. We do not currently carry key-man life insurance on any
of our officers. See Part III Item 9 for more details on
Management.




COMPETITION
FROM LARGE PRODUCERS OF PETROLEUM-BASED GASOLINE ADDITIVES AND OTHER COMPETITIVE
PRODUCTS MAY IMPACT OUR PROFITABILITY.




Our
proposed ethanol plants will also compete with producers of other gasoline
additives made from other raw materials having similar octane and oxygenate
values as ethanol. The major oil companies have significantly greater resources
than we have to develop alternative products and to influence legislation and
public perception of ethanol. These other companies also have significant
resources to begin production of ethanol should they choose to do
so.




We
will also compete with producers of other gasoline additives having similar
octane and oxygenate values as ethanol. An example of such other additives is
MTBE, a petrochemical derived from methanol. MTBE costs less to produce than
ethanol. Many major oil companies produce MTBE and because it is
petroleum-based, its use is strongly supported by major oil companies.
Alternative fuels, gasoline oxygenates and alternative ethanol production
methods are also continually under development. The major oil companies have
significantly greater resources than we have to market MTBE, to develop
alternative products, and to influence legislation and public perception of MTBE
and ethanol.




OUR
BUSINESS PROSPECTS WILL BE IMPACTED BY CORN SUPPLY.




Our
ethanol will be produced from cellulose, however currently most ethanol is
produced from corn, which is affected by weather, governmental policy, disease
and other conditions. A significant increase in the availability of corn and
resulting reduction in the price of corn may decrease the price of ethanol and
harm our business.




IF
ETHANOL AND GASOLINE PRICES DROP SIGNIFICANTLY, WE WILL ALSO BE FORCED TO REDUCE
OUR PRICES, WHICH POTENTIALLY MAY LEAD TO FURTHER LOSSES.




Prices
for ethanol products can vary significantly over time and decreases in price
levels could adversely affect our profitability and viability. The price of
ethanol has some relation to the price of gasoline. The price of ethanol tends
to increase as the price of gasoline increases, and the price of ethanol tends
to decrease as the price of gasoline decreases. Any lowering
of gasoline prices will likely also lead to lower prices for ethanol and
adversely affect our operating results. We cannot assure you that we will be
able to sell our ethanol profitably, or at all.















INCREASED
ETHANOL PRODUCTION FROM CELLULOSE IN THE UNITED STATES COULD INCREASE THE DEMAND
AND PRICE OF FEEDSTOCKS, REDUCING OUR PROFITABILITY.




New
ethanol plants that utilize cellulose as their feedstock may be under
construction or in the planning stages throughout the United States. This
increased ethanol production could increase cellulose demand and prices,
resulting in higher production costs and lower profits.




PRICE
INCREASES OR INTERRUPTIONS IN NEEDED ENERGY SUPPLIES COULD CAUSE LOSS OF
CUSTOMERS AND IMPAIR OUR PROFITABILITY.




Ethanol
production requires a constant and consistent supply of energy. If there is any
interruption in our supply of energy for whatever reason, such as availability,
delivery or mechanical problems, we may be required to halt production. If we
halt production for any extended period of time, it will have a material adverse
effect on our business. Natural gas and electricity prices have historically
fluctuated significantly. We purchase significant amounts of these resources as
part of our ethanol production. Increases in the price of natural gas or
electricity would harm our business and financial results by increasing our
energy costs.




OUR
BUSINESS PLAN CALLS FOR EXTENSIVE AMOUNTS OF FUNDING TO CONSTRUCT AND OPERATE
OUR BIOREFINERY PROJECTS AND WE MAY NOT BE ABLE TO OBTAIN SUCH FUNDING WHICH
COULD ADVERSELY AFFECT OUR BUSINESS, OPERATIONS AND FINANCIAL
CONDITION.




Our
business plan depends on the completion of up to 19 numerous biorefinery
projects. Although each facility will have specific funding requirements, a
proposed facility in Los Angeles County will require approximately $30 million
to fund. We will be relying on additional financing, and funding from such
sources as The Energy Policy Act grants and loan guarantee programs, and the
Biorefinery Demonstration Project Program.  We are currently in
discussions with potential sources of financing but no definitive agreements are
in place. If we cannot achieve the requisite financing or complete the projects
as anticipated, this could adversely affect our business, the results of our
operations, prospects and financial condition.




RISKS
RELATED TO GOVERNMENT REGULATION AND SUBSIDIZATION




FEDERAL
REGULATIONS CONCERNING TAX INCENTIVES COULD EXPIRE OR CHANGE, WHICH COULD CAUSE
AN EROSION OF THE CURRENT COMPETITIVE STRENGTH OF THE ETHANOL
INDUSTRY.




Congress
currently provides certain federal tax credits for ethanol producers and
marketers. The current ethanol industry and our business initially depend on the
continuation of these credits. The credits have supported a market for ethanol
that might disappear without the credits. The credits are scheduled to expire
December 31, 2010. These credits may not continue beyond their scheduled
expiration date or, if they continue, the incentives may not be at the same
level. The revocation or amendment of any one or more of these tax incentives
could adversely affect the future use of ethanol in a material way, and we
cannot assure investors that any of these tax incentives will be continued. The
elimination or reduction of federal tax incentives to the ethanol industry could
have a material adverse impact on the industry as a whole.




LAX
ENFORCEMENT OF ENVIRONMENTAL AND ENERGY POLICY REGULATIONS MAY ADVERSELY AFFECT
DEMAND FOR ETHANOL




Our
success will depend in part on effective enforcement of existing environmental
and energy policy regulations. Many of our potential customers are unlikely to
switch from the use of conventional fuels unless compliance with applicable
regulatory requirements leads, directly or indirectly, to the use of ethanol.
Both additional regulation and enforcement of such regulatory provisions are
likely to be vigorously opposed by the entities affected by such requirements.
If existing emissions-reducing standards are weakened, or if governments are not
active and effective in enforcing such standards, our business and results of
operations could be adversely affected. Even if the current trend toward more
stringent emission standards
continues, we will depend on the ability of ethanol to satisfy these emissions
standards more efficiently than other alternative technologies. Certain
standards imposed by regulatory programs may limit or preclude the use of our
products to comply with environmental or energy requirements. Any decrease in
the emission standards or the failure to enforce existing emission standards and
other regulations could result in a reduced demand for ethanol. A significant
decrease in the demand for ethanol will reduce the price of ethanol, adversely
affect our profitability and decrease the value of your
stock.















COSTS
OF COMPLIANCE WITH BURDENSOME OR CHANGING ENVIRONMENTAL AND OPERATIONAL SAFETY
REGULATIONS COULD CAUSE OUR FOCUS TO BE DIVERTED AWAY FROM OUR BUSINESS AND OUR
RESULTS OF OPERATIONS TO SUFFER




Ethanol
production involves the emission of various airborne pollutants, including
particulate matter, carbon monoxide, carbon dioxide, nitrous oxide, volatile
organic compounds and sulfur dioxide. The production facilities that we will
build will discharge water into the environment. As a result, we are subject to
complicated environmental regulations of the U.S. Environmental Protection
Agency and regulations and permitting requirements of the states where our
plants are to be located. These regulations are subject to change and such
changes may require additional capital expenditures or increased operating
costs. Consequently, considerable resources may be required to comply with
future environmental regulations. In addition, our ethanol plants could be
subject to environmental nuisance or related claims by employees, property
owners or residents near the ethanol plants arising from air or water
discharges. Ethanol production has been known to produce an odor to which
surrounding residents could object. Environmental and public nuisance claims, or
tort claims based on emissions, or increased environmental compliance costs
could significantly increase our operating costs.




OUR
PROPOSED NEW ETHANOL PLANTS WILL ALSO BE SUBJECT TO FEDERAL AND STATE LAWS
REGARDING OCCUPATIONAL SAFETY




Risks
of substantial compliance costs and liabilities are inherent in ethanol
production. We may be subject to costs and liabilities related to worker safety
and job related injuries, some of which may be significant. Possible future
developments, including stricter safety laws for workers and other individuals,
regulations and enforcement policies and claims for personal or property damages
resulting from operation of the ethanol plants could reduce the amount of cash
that would otherwise be available to further enhance our business.




RISKS
RELATED TO OUR COMMON STOCK




THERE
IS NO LIQUID MARKET FOR OUR COMMON STOCK.




Our
shares are traded on the OTCBB and the trading volume has historically been very
low. An active trading market for our shares may not develop or be sustained. We
cannot predict at this time how actively our shares will trade in the public
market or whether the price of our shares in the public market will reflect our
actual financial performance.




OUR
COMMON STOCK PRICE HAS FLUCTUATED CONSIDERABLY AND STOCKHOLDERS MAY NOT BE ABLE
TO RESELL THEIR SHARES AT OR ABOVE THE PRICE AT WHICH SUCH SHARES WERE
PURCHASED




The
market price of our common stock may fluctuate significantly.  Between
July 11, 2006, the day we began trading publicly as BFRE.PK, and
December 31, 2007, the high and low price for our common stock has been
$7.90 and $1.30 per share, respectively.  Our share price has
fluctuated in response to various factors, including not yet beginning
construction of our first plant, needing additional time to organize engineering
resources, issues relating to feedstock sources, trying to locate suitable plant
locations, locating distributors and finding funding sources.




OUR
COMMON STOCK MAY BE CONSIDERED “A PENNY STOCK” AND MAY BE DIFFICULT FOR YOU TO
SELL




The
SEC has adopted regulations which generally define “penny stock” to be an equity
security that has a market price of less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to specific exemptions. The market
price of our common stock has been for much of its trading history since July
11, 2006, and may continue to be less than $5.00 per
share, and therefore may be designated as a “penny stock” according to SEC
rules. This designation requires any broker or dealer selling these securities
to disclose certain information concerning the transaction, obtain a written
agreement from the purchaser and determine that the purchaser is reasonably
suitable to purchase the securities. These rules may restrict the ability of
brokers or dealers to sell our common stock and may affect the ability of
investors to sell their shares.















FAILURE
TO ACHIEVE AND MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH SECTION
404 OF THE SARBANES-OXLEY ACT OF 2002 COULD HAVE A MATERIAL ADVERSE EFFECT ON
OUR BUSINESS AND OPERATING RESULTS




It
may be time consuming, difficult and costly for us to develop and implement the
additional internal controls, processes and reporting procedures required by the
Sarbanes-Oxley Act. If we are unable to comply with these requirements of the
Sarbanes-Oxley Act, we may not be able to obtain the independent accountant
certifications that the Sarbanes-Oxley Act requires of publicly traded
companies.




If
we fail to comply in a timely manner with the requirements of Section 404 of the
Sarbanes-Oxley Act regarding internal control over financial reporting or to
remedy any material weaknesses in our internal controls that we may identify,
such failure could result in material misstatements in our financial statements,
cause investors to lose confidence in our reported financial information and
have a negative effect on the trading price of our common stock.




Pursuant
to Section 404 of the Sarbanes-Oxley Act and current SEC regulations, beginning
with this annual report on Form 10-KSB for our fiscal period ending December 31,
2007, we are required to prepare assessments regarding internal controls over
financial reporting and beginning with our annual report on Form 10-KSB for our
fiscal period ending December 31, 2008, furnish a report by our management on
our internal control over financial reporting. We have begun the process of
documenting and testing our internal control procedures in order to satisfy
these requirements, which has resulted in increased general and administrative
expenses and has shifted management time and attention from revenue-generating
activities to compliance activities. There can be no assurance that our auditors
will be able to issue an unqualified opinion on management’s assessment of the
effectiveness of our internal control over financial reporting. Failure to
achieve and maintain an effective internal control environment or complete our
Section 404 certifications could have a material adverse effect on our stock
price.




In
addition, in connection with our on-going assessment of the effectiveness of our
internal control over financial reporting, we may discover “material weaknesses”
in our internal controls as defined in standards established by the Public
Company Accounting Oversight Board, or the PCAOB. A material weakness is a
significant deficiency, or combination of significant deficiencies, that results
in more than a remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected. The PCAOB
defines “significant deficiency” as a deficiency that results in more than a
remote likelihood that a misstatement of the financial statements that is more
than inconsequential will not be prevented or detected.




In
the event that a material weakness is identified, we will employ qualified
personnel and adopt and implement policies and procedures to address any
material weaknesses that we identify. However, the process of designing and
implementing effective internal controls is a continuous effort that requires us
to anticipate and react to changes in our business and the economic and
regulatory environments and to expend significant resources to maintain a system
of internal controls that is adequate to satisfy our reporting obligations as a
public company. We cannot assure you that the measures we will take will
remediate any material weaknesses that we may identify or that we will implement
and maintain adequate controls over our financial process and reporting in the
future.




Any
failure to remediate any material weaknesses that we may identify or to
implement new or improved controls, or difficulties encountered in their
implementation, could harm our operating results, cause us to fail to meet our
reporting obligations or result in material misstatements in our financial
statements. Any such failure could also adversely affect the results of the
periodic management evaluations of our internal controls and, in the case of a
failure to remediate any material weaknesses that we may identify, would
adversely affect the annual auditor attestation reports regarding the
effectiveness of our internal control over financial reporting that are required
under Section 404 of the Sarbanes-Oxley Act of 2002. Inadequate internal
controls could also cause investors to lose confidence in our reported financial
information, which could have a negative effect on the trading price of our
common stock.













OUR
PRINCIPAL STOCKHOLDER HAS SIGNIFICANT VOTING POWER AND MAY TAKE ACTIONS THAT MAY
NOT BE IN THE BEST INTEREST OF ALL OTHER STOCKHOLDERS




The
Company’s Chairman and President controls approximately 48.5% of its current
outstanding shares of voting common stock. He may be able to exert significant
control over our management and affairs requiring stockholder approval,
including approval of significant corporate transactions. This concentration of
ownership may expedite approvals of company decisions, or have the effect of
delaying or preventing a change in control, adversely affect the market price of
our common stock, or be in the best interests of all our
stockholders.




YOU
COULD BE DILUTED FROM THE ISSUANCE OF ADDITIONAL COMMON STOCK.




As
of January 31, 2008, we had 28,061,553 shares of common stock outstanding
and no shares of preferred stock outstanding.  We are authorized to
issue up to 100,000,000 shares of common stock and 1,000,000 shares of preferred
stock. To the extent of such authorization, our Board of Directors will have the
ability, without seeking stockholder approval, to issue additional shares of
common stock or preferred stock in the future for such consideration as the
Board of Directors may consider sufficient. The issuance of additional common
stock or preferred stock in the future may reduce your proportionate ownership
and voting power.




ITEM
7. FINANCIAL STATEMENTS




INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTSReport
      of Independent Registered Public Accounting Firm
            F-1Consolidated
      Balance Sheet as of December 31, 2007
            F-2Consolidated Statements of Operations for the year ended December 31,
      2007, for the period from March 28, 2006 (Inception) to December 31, 2006
      and for the period from March 28, 2006 (Inception) to December 31,
      2007
            F-3Consolidated
      Statements of Stockholders Equity (Deficit) for the period from March 28,
      2006 (Inception) to December 31, 2006, and for the year ended December 31,
      2007
            F-4Consolidated
      Statements of Cash Flows for the year ended December 31, 2007, the period
      from March 28, 2006 (Inception) to December 31, 2006, and for the period
      from March 28, 2006 (Inception) to December 31, 2007
            F-6Notes to Consolidated Financial Statements
            F-7
















Report
of Independent Registered Public Accounting Firm




The
Board of Directors and Shareholders  BlueFire Ethanol Fuels, Inc. and
Subsidiary




We
have audited the accompanying consolidated balance sheet of BlueFire Ethanol
Fuels, Inc. and subsidiary, a development-stage company, (the “Company”) as of
December 31, 2007, and the related consolidated statements of operations,
stockholders’ deficit, and cash flows for the year ended December 31, 2007, the
period from March
28, 2006 (“Inception”) to December 31, 2006, and for the period from Inception
to December 31, 2007.  These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.




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




In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the  financial position of BlueFire
Ethanol Fuels, Inc. and subsidiary, as of December 31, 2007, and the results of
their operations and their cash flows for the year ended December 31, 2007, the
period from Inception to  December 31, 2006, and the period from
Inception to December 31, 2007, in conformity with
accounting  principles generally accepted in the United States of
America.






/s/
McKennon Wilson & Morgan LLP




Irvine,
California


February
22, 2008








F-1
 
 BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARY
 (A
DEVELOPMENT-STAGE COMPANY)
 CONSOLIDATED
BALANCE SHEET








December
      31, 2007ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            13,031,939Accounts
      receivable
            
            
            49,000Prepaid
      expenses
            
            
            16,542Total
      current assets
            
            
            13,097,481Prepaid
      fees to related party
            
            
            30,000Property
      and equipment, net of accumulated
              depreciation
      of $406
            
            
            151,007Total
      assets
            
            $
            13,278,488LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
            
            $
            382,679Accrued
      liabilities
            
            
            267,671Total
      current liabilities
            
            
            650,350Commitments
      and contingencies (Note6)
            
            
            -Stockholders’
      equity (deficit):Preferred
      stock, no par value, 1,000,000 shares
              authorized;
      none issued and outstanding
            
            
            -Common
      stock, $0.001 par value; 100,000,000shares
      authorized; 28,061,553 sharesissued
      and outstanding
            
            
            28,061Additional
      paid-in capital
            
            
            28,431,992Deficit
      accumulated during the development stage
            
            
            (15,831,915
            )Total
      stockholders’ equity
            
            
            12,628,138Total
      liabilities and stockholders’ equity
            
            $
            13,278,488


See accompanying notes to
consolidated financial statements




F-2
 
 BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARY
 (A
DEVELOPMENT-STAGE COMPANY)
 CONSOLIDATED
STATEMENTS OF OPERATIONS





For
      the year ended December 31,
            
            
            From
      March 28, 2006 (Inception) Through December 31,
            
            
            From
      March 28, 2006 (Inception) Through December 31,2007
            
            
            2006
            
            
            2007Revenues
            
            $
            49,000
            
            
            $
            -
            
            
            $
            49,000Operating
      expenses:Project
      development, including stock based compensation of $2,387,634,
      $2,500  and $2,390,134, respectively
            
            
            4,930,739
            
            
            
            466,002
            
            
            
            5,396,741General
      and administrative, including stock based compensation of $4,061,808,
      $112,311  and $4,174,119, respectively
            
            
            5,595,125
            
            
            
            1,083,195
            
            
            
            6,678,320Total
      operating expenses
            
            
            10,525,864
            
            
            
            1,549,197
            
            
            
            12,075,061Operating
      loss
            
            
            (10,476,864
            )
            
            
            (1,549,197
            )
            
            
            (12,026,061
            )Other
      income and (expense):Other
      income
            
            
            18,903
            
            
            
            2,800
            
            
            
            21,703Financing
      related charge
            
            
            (211,660
            )
            
            
            -
            
            
            
            (211,660
            )Amortization
      of debt discount
            
            
            (676,982
            )
            
            
            -
            
            
            
            (676,982
            )Interest
      expense
            
            
            (56,097
            )
            
            
            -
            
            
            
            (56,097
            )Related
      party interest expense
            
            
            (55,348
            )
            
            
            (9,100
            )
            
            
            (64,448
            )Loss
      on extinguishment of  debt
            
            
            (2,818,370
            )
            
            
            -
            
            
            
            (2,818,370
            )Net
      loss
            
            $
            (14,276,418
            )
            
            $
            (1,555,497
            )
            
            $
            (15,831,915
            )Basic
      and diluted loss per common share
            
            $
            (0.65
            )
            
            $
            (0.08
            )Weighted
      average common shares outstanding, basic and diluted
            
            
            21,848,126
            
            
            
            19,711,225








F-3
 
 BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARY
 (A
DEVELOPMENT-STAGE COMPANY)
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)





Common
      StockShares
                
                
                Amount
                
                
                Additional
                  Paid-in
                  Capital
                
                DeficitAccumulated
                  DuringDevelopmentStage
                
                Stockholders'
      Equity
                  (Deficit)Balance
      at March 28, 2006 (inception)
                
                
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Issuance
      of founder’s share at $.001 per share
                
                
                17,000,000
                
                
                
                17,000
                
                
                
                
                
                
                
                
                
                
                
                17,000Common
      shares retained by Sucre Agricultural Corp., Shareholders
                
                
                4,028,264
                
                
                
                4,028
                
                
                
                685,972
                
                
                
                -
                
                
                
                690,000Costs
      associated  with the acquisition of Sucre Agricultural
      Corp.
                
                
                
                
                
                
                
                
                
                
                (3,550
                )
                
                
                
                
                
                
                (3,550
                )Common
      shares issued for services in November 2006  at $2.99 per share
      (Note 5)
                
                
                37,500
                
                
                
                38
                
                
                
                111,962
                
                
                
                -
                
                
                
                112,000Common
      shares issued for services in November 2006 at $3.35 per share (Note
      5)
                
                
                20,000
                
                
                
                20
                
                
                
                66,981
                
                
                
                -
                
                
                
                67,001Common
      shares issued for services in December 2006 at $3.65 per share (Note
      5)
                
                
                20,000
                
                
                
                20
                
                
                
                72,980
                
                
                
                -
                
                
                
                73,000Common
      shares issued for services in December 2006 at $3.65 per share (Note
      5)
                
                
                20,000
                
                
                
                20
                
                
                
                72,980
                
                
                
                -
                
                
                
                73,000Estimated
      value of common shares at $3.99 per share and warrants at $2.90 issuable
      for services upon vesting in February 2007 (Note 5)
                
                
                -
                
                
                
                -
                
                
                
                160,000
                
                
                
                -
                
                
                
                160,000Share-based
      compensation related to options (Note 6)
                
                
                -
                
                
                
                -
                
                
                
                114,811
                
                
                
                -
                
                
                
                114,811Share-based
      compensation related to warrants (Note 6)
                
                
                -
                
                
                
                -
                
                
                
                100,254
                
                
                
                -
                
                
                
                100,254Net
      Loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,555,497
                )
                
                
                (1,555,497
                )Balances
      at December 31, 2006
                
                
                21,125,764
                
                
                $
                21,126
                
                
                $
                1,382,390
                
                
                $
                (1,555,497
                )
                
                $
                (151,981
                )
   F-4
  BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARY
 (A
DEVELOPMENT-STAGE COMPANY)
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
   Common
      StockShares
                
                
                Amount
                
                
                Additional
                  Paid-in
                  Capital
                
                DeficitAccumulated
                  DuringDevelopmentStage
                
                Stockholders'
      Equity
                  (Deficit)Balances at December 31,
      2006
                
                
                21,125,764
                
                
                $
                21,126
                
                
                $
                1,382,390
                
                
                $
                (1,555,497
                )
                
                $
                (151,981
                )Common shares issued for cash in
      January 2007, at $2.00 per share to unrelated individuals, including costs
      associated with private placement of 6,250 common shares and $12,500 cash
      paid
                
                
                284,750
                
                
                
                285
                
                
                
                755,875
                
                
                
                -
                
                
                
                756,160Amortization of share based
      compensation related to employment agreement in January 2007 $3.99 per
      share
                
                
                10,000
                
                
                
                10
                
                
                
                39,890
                
                
                
                -
                
                
                
                39,900Common shares issued for services
      in February 2007 at $5.92 per share
                
                
                37,500
                
                
                
                38
                
                
                
                138,837
                
                
                
                -
                
                
                
                138,875Adjustment to record remaining
      value of warrants at $4.70 per share issued for services in February
      2007
                
                
                -
                
                
                
                -
                
                
                
                158,118
                
                
                
                -
                
                
                
                158,118Common shares issued for services
      in March 2007 at $7.18 per share
                
                
                37,500
                
                
                
                37
                
                
                
                269,213
                
                
                
                -
                
                
                
                269,250Fair value of warrants at $6.11
      for services vested in March 2007
                
                
                -
                
                
                
                -
                
                
                
                305,307
                
                
                
                -
                
                
                
                305,307Fair value of warrants at $5.40
      for services vested in June 2007
                
                
                -
                
                
                
                -
                
                
                
                269,839
                
                
                
                -
                
                
                
                269,839Common shares issued for services
      in June 2007 at $6.25 per share
                
                
                37,500
                
                
                
                37
                
                
                
                234,338
                
                
                
                -
                
                
                
                234,375Share-based compensation related
      to employment agreement in February 2007 $5.50 per
      share
                
                
                50,000
                
                
                
                50
                
                
                
                274,951
                
                
                
                -
                
                
                
                275,001Common shares issued for services
      in August 2007 at $5.07 per share
                
                
                13,000
                
                
                
                13
                
                
                
                65,901
                
                
                
                -
                
                
                
                65,914Share-based compensation related
      to options
                
                
                -
                
                
                
                -
                
                
                
                4,692,863
                
                
                
                -
                
                
                
                4,692,863Fair value of warrants issued in
      August 2007 for debt placement services valued at $4.18 per
      share
                
                
                -
                
                
                
                -
                
                
                
                107,459
                
                
                
                -
                
                
                
                107,459Relative fair value of warrants
      associated with July 2007 convertible note
agreement
                
                
                -
                
                
                
                -
                
                
                
                332,255
                
                
                
                -
                
                
                
                332,255Exercise of stock options in July
      2007 at  $2.00 per share
                
                
                20,000
                
                
                
                20
                
                
                
                39,980
                
                
                
                -
                
                
                
                40,000Relative fair value of warrants
      and beneficial conversion feature in connection with the $2,000,000
      convertible note payable in August 2007
                
                
                -
                
                
                
                -
                
                
                
                2,000,000
                
                
                
                -
                
                
                
                2,000,000Stock issued in lieu of Interest
      payments on the senior secured convertible note at $4.48 and $2.96 per
      share in October and December 2007
                
                
                15,143
                
                
                
                15
                
                
                
                55,569
                
                
                
                -
                
                
                
                55,584Conversion of $2,000,000 note
      payable in August 2007 at $2.90 per share
                
                
                689,655
                
                
                
                689
                
                
                
                1,999,311
                
                
                
                -
                
                
                
                2,000,000Common shares issued for cash at
      $2.70 per share, December 2007, net of legal costs of $90,000 and
      placement agent cost of $1,050,000
                
                
                5,740,741
                
                
                
                5,741
                
                
                
                14,354,259
                
                
                
                -
                
                
                
                14,360,000Loss on extinguishment of
      debt  in December 2007
                
                
                -
                
                
                
                -
                
                
                
                955,637
                
                
                
                -
                
                
                
                955,637Net loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (14,276,418
                )
                
                
                (14,276,418
                )Balances at December 31,
      2007
                
                
                28,061,553
                
                
                $
                28,061
                
                
                $
                28,431,992
                
                
                $
                (15,831,915
                )
                
                $
                12,628,138
 
 F-5
 
 BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARY
 (A
DEVELOPMENT-STAGE COMPANY)
 CONSOLIDATED
STATEMENTS OF CASH FLOWS


For
      the Year ended December 31,
            
            
            From
      March 28, 2006 (Inception) to December 31,
            
            
            From
      March 28, 2006 (Inception) to December 31,2007
            
            
            2006
            
            
            2007Cash
      flows from operating activities:Net
      loss
            
            $
            (14,276,418
            )
            
            $
            (1,555,497
            )
            
            $
            (15,831,915
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Founders
      shares
            
            
            -
            
            
            
            17,000
            
            
            
            17,000Costs
      associated with purchase of Sucre
              Agricultural
      Corp
            
            
            -
            
            
            
            (3,550
            )
            
            
            (3,550
            )Interest
      expense on beneficial conversion feature
              of
      convertible notes
            
            
            676,983
            
            
            
            -
            
            
            
            676,983Loss
      on extinguishment of convertible debt
            
            
            2,718,370
            
            
            
            -
            
            
            
            2,718,370Common
      stock issued for interest on convertible
              notes
            
            
            55,585
            
            
            
            -
            
            
            
            55,585Discount
      on sale of stock associated with private
              placement
            
            
            211,660
            
            
            
            -
            
            
            
            211,660Share-based
      compensation
            
            
            6,449,441
            
            
            
            700,066
            
            
            
            7,149,507Depreciation
            
            
            409
            
            
            
            -
            
            
            
            409Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (49,000
            )
            
            
            -
            
            
            
            (49,000
            )Prepaid
      fees to related party
            
            
            -
            
            
            
            (30,000
            )
            
            
            (30,000
            )Prepaid
      expenses and other current assets
            
            
            (16,542
            )
            
            
            -
            
            
            
            (16,542
            )Accounts
      payable
            
            
            315,729
            
            
            
            66,949
            
            
            
            382,678Accrued
      liabilities
            
            
            249,978
            
            
            
            17,692
            
            
            
            267,670Accrued
      interest to related party
            
            
            (9,100
            )
            
            
            9,100
            
            
            
            -Net
      cash used in operating activities
            
            
            (3,672,905
            )
            
            
            (778,240
            )
            
            
            (4,451,145
            )Cash
      flows from investing activities:Acquisition
      of property and equipment
            
            
            (151,416
            )
            
            
            -
            
            
            
            (151,416
            )Cash
      flows from financing activities:Cash
      received in acquisition of
              Sucre
      Agricultural Corp.
            
            
            -
            
            
            
            690,000
            
            
            
            690,000Proceeds
      from sale of stock through
              private
      placement
            
            
            544,500
            
            
            
            -
            
            
            
            544,500Proceeds
      from exercise of stock options
            
            
            40,000
            
            
            
            -
            
            
            
            40,000Proceeds
      from issuance of common stock
            
            
            14,360,000
            
            
            
            -
            
            
            
            14,360,000Proceeds
      from convertible notes payable
            
            
            2,500,000
            
            
            
            -
            
            
            
            2,500,000Repayment
      of notes payable
            
            
            (500,000
            )
            
            
            -
            
            
            
            (500,000
            )Proceeds
      from related party notes payable
            
            
            25,000
            
            
            
            91,000
            
            
            
            116,000Repayment
      of related party notes payable
            
            
            (116,000
            )
            
            
            -
            
            
            
            (116.000
            )Net
      cash provided by financing activities
            
            
            16,853,500
            
            
            
            781,000
            
            
            
            17,634,500Net
      increase in cash and cash equivalents
            
            
            13,029,179
            
            
            
            2,760
            
            
            
            13,031,939Cash
      and cash equivalents beginning of period
            
            
            2,760
            
            
            
            -
            
            
            
            -Cash
      and cash equivalents end of period
            
            $
            13,031,939
            
            
            $
            2,760
            
            
            $
            13,031,939Supplemental
      disclosures of cash flow informationCash
      paid during the period for:Interest
            
            $
            56,375
            
            
            $
            -
            
            
            $
            56,375Income
      taxes
            
            $
            800
            
            
            $
            800
            
            
            $
            800Supplement
      schedule of noncash investing and financing activities:Conversion
      of senior secured convertible notes payable
            
            $
            2,000,000
            
            
            $
            -
            
            
            $
            2,000,000Interest
      converted to common stock
            
            $
            55,569
            
            
            $
            -
            
            
            $
            55,569Fair
      value of warrents issued to placement agents
            
            $
            725,591
            
            
            $
            -
            
            
            $
            725,591








F-6
 
 BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARY
 (A
DEVELOPMENT-STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS










NOTE 1 - ORGANIZATION AND
BUSINESS




BlueFire Ethanol, Inc. (“BlueFire”) was
incorporated in the state of Nevada on March 28, 2006 (“Inception”). BlueFire
was established to deploy the commercially ready and patented process for the
conversion of cellulosic waste materials to ethanol (“Arkenol Technology”) under
a technology license agreement with Arkenol, Inc. (“Arkenol”). BlueFire’s use of
the Arkenol Technology positions it as a cellulose-to-ethanol company with
demonstrated production of ethanol from urban trash (post-sorted “MSW”), rice
and wheat straws, wood waste and other agricultural residues. The Company’s goal
is to develop and operate high-value carbohydrate-based transportation fuel
production facilities in North America, and to provide professional services to
such facilities worldwide. These “biorefineries” will convert widely available,
inexpensive, organic materials such as agricultural residues, high-content
biomass crops, wood residues, and cellulose from MSW into
ethanol.





BlueFire’s business will encompass
development activities leading to the construction and long-term operation of
production facilities. BlueFire is currently in the development stage of
deploying project opportunities for converting cellulose fractions of municipal
solid waste and other opportunistic feedstock into ethanol fuels. The Company
entered into an Asset Transfer and Acquisition Agreement with ARK Energy, Inc.
(“ARK Energy”). Based upon the terms of the agreement, ARK Energy transferred
certain rights, assets, work-product, intellectual property and other know-how
on 19 project opportunities, that management estimates is worth approximately
$16,000,000, which may be used by BlueFire to accelerate its deployment of the
Arkenol technology.





On June 27, 2006, BlueFire completed a
reverse acquisition of Sucre Agricultural Corp. (“Sucre”), a Delaware
corporation. At the time of acquisition, Sucre had no operations, revenues or
liabilities. The only asset possessed by Sucre was $690,000 in cash which was
included in the acquisition. Sucre was considered a blank-check company prior to
the acquisition. In connection with the acquisition Sucre issued BlueFire
17,000,000 shares of common stock, approximately 85% of the outstanding common
stock of Sucre, for all the issued and outstanding BlueFire common stock. The
Sucre stockholders retained 4,028,264 shares of Sucre common
stock.





NOTE 2 - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES





Managements’ Plans





The Company is a development-stage
company which has incurred losses since inception. Management has funded
operations primarily through proceeds received in connection with the reverse
merger, loans from its majority shareholder, the private placement of the
Company’s common stock in January 2007, the issuance of convertible notes with
warrants in July and in August 2007 and from the sale of the Company’s common
stock in December 2007. The Company may encounter difficulties in establishing
these operations due to the time frame of developing, constructing and
ultimately operating the planned bio-refinery projects.





As of December 31, 2007, the Company has
working capital of approximately $12,450,000. In December 2007, the Company
obtained net proceeds of approximately $14,500,000 from the issuance of its
common stock.  The proceeds received are expected to be used in
operations, and in funding plant design and development
costs.  Management has estimated that cash operating expenses for the
next twelve months will approximate roughly $2,400,000, excluding engineering
costs related to the development of bio-refinery projects.  Although
the costs of construction is not readily determinable, the Company estimates the
cost to be approximately $30 million for its first plant. The Company is
currently in discussions with potential sources of financing for this facility
but no definitive agreements are in place.





Changes in Reporting
Entity





The acquisition of Sucre Agricultural
Corp. by BlueFire Ethanol, Inc., as discussed in Note 1, was accounted for as a
reverse acquisition, whereby the assets and liabilities of BlueFire are reported
at their historical cost since the entities are under common control immediately
after the acquisition in accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 141 “Business Combinations.” The assets and liabilities
of Sucre, which were not significant, were recorded at fair value on June 27,
2006, the date of the acquisition. No goodwill was recorded in connection with
the reverse acquisition since Sucre had no business. The reverse acquisition
resulted in a change in the reporting entity of Sucre, for accounting and
reporting purposes. Accordingly, the financial statements herein reflect the
operations of BlueFire from Inception and Sucre from June 27, 2006, the date of
acquisition, through December 31, 2006. The 4,028,264 shares retained by the
stockholders of Sucre have been recorded on the date of acquisition of June 27,
2006.








F-7
 
 BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARY
 (A
DEVELOPMENT-STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








Principles of
Consolidation









Use of Estimates





The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reported periods. Significant
estimates include the fair value of options and warrants issued during the
reporting period. Actual results could materially differ from those
estimates.





Cash and Cash
Equivalents




For purpose of the statement of cash
flows, the Company considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents. The Company
maintainscash balances at several financial
institutions located in Southern California. Accounts at each institution are
insured by the Federal Deposit Insurance Corporation up to $100,000.




Accounts Receivable





Accounts receivable are reported net of
allowance for expected losses.  It represents the amount management
expects to collect from outstanding balances. Differences between the amount due
and the amount management expects to collect are charged to operations in the
year in which those differences are determined, with an offsetting entry to a
valuation allowance.





Depreciation





The Company’s fixed assets are
depreciated using primarily the straight-line method over a period ranging from
one to five years.





Revenue Recognition





The Company is currently a
developmental-stage company. The Company recognizes revenues from 1) consulting
services rendered to potential sublicensees for development and construction of
cellulose to ethanol projects, and 2) will recognize sales of ethanol from its
production facilities when (a) persuasive evidence that an agreement exists; (b)
the products have been delivered; (c) the prices are fixed and determinable and
not subject to refund or adjustment; and (d) collection of the amounts due is
reasonably assured.





Project Development





Project development costs are either
expensed or capitalized. The costs of materials and equipment that will be
acquired or constructed for project development activities, and that have
alternative future uses, both in project development, marketing or sales, will
be classified as property and equipment and depreciated over their estimated
useful lives. To date, project development costs include the research and
development expenses related to the Company’s future cellulose-to-ethanol
production facilities.  During the year ended December 31, 2007, for
the period from March 28, 2006 (Inception) to December 31, 2006, and for the
period from March 28, 2006 (Inception) to December 31, 2007 research and
development costs included in Project Development were approximately
$2,543,000,$464,000
and $3,084,000 respectively.








F-8
 
 BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARY
 (A
DEVELOPMENT-STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





Convertible Debt
 
 Convertible debt is accounted for under
the guidelines established by APB Opinion No. 14 “Accounting for Convertible
Debt and Debt issued with Stock Purchase Warrants”  under the
direction of Emerging Issues Task Force (“EITF”) 98-5,





The Company accounts for modifications
of its Embedded Conversion Features (“ECF’s”) in accordance with EITF”
06-6”).  EITF
06-6 requires the modification of a convertible debt instrument that changes the
fair value of an embedded conversion feature and the subsequent recognition of
interest expense or the associated debt instrument when the modification does
not result in a debt extinguishment pursuant to EITF 96-19.”Debtor’s Accounting
for a Modification or Exchange of Debt Instruments” (“EITF
96-16”).





Equity Instruments Issued with
Registration Rights Agreement





The
Company accounts for these penalties as contingent liabilities, applying the
accounting guidance of SFAS No. 5, “Accounting for Contingencies”. This
accounting is consistent with views established by FASB Staff Positions FSP EITF
00-19-2 “Accounting for Registration Payment Arrangements”, which was issued
December 21, 2006. Accordingly, the Company recognizes damages when it becomes
probable that they will be incurred and amounts are reasonably
estimable.





In
connection with the issuance of common stock for gross proceeds of $15,500,000
in December  2007 and the $2,000,000 convertible note financing in
August 2007, the Company was required to file a registration statement on Form
SB-2 or Form S-3 with the Securities and Exchange Commission in order to
register the resale of the common stock under the Securities Act.  The
Company filed that registration statement on December 18, 2007 and is required
under the registration rights agreement to have that registration statement
declared effective by the Securities and Exchange Commission (“SEC”) by May 12,
2008 and March 18, 2008, respectively. In the event the registration statement
is not declared effective by these date, the Company will be required to pay
liquidated damages equal to 1% per 30 day period equal to the purchase price
paid by the investors. As of December 31, 2007, the Company does not believe
that damages are probable and thus no amounts have been accrued in the
accompanying consolidated financial statements.





Income Taxes





The Company accounts for income taxes in
accordance with Financial Accounting Standards Board (“FASB”) Statement No. 109
“Accounting for Income Taxes.” SFAS No. 109 requires the Company to provide a
net deferred tax asset/liability equal to the expected future tax
benefit/expense of temporary reporting differences between book and tax
accounting methods and any available operating loss or tax credit carry
forwards.





In July 2006, the FASB issued
Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income
Taxes”. This Interpretation
sets forth a recognition threshold and valuation method to recognize and measure
an income tax position taken, or expected to be taken, in a tax return. The
evaluation is based on a two-step approach. The first step requires an entity to
evaluate whether the tax position would “more likely than not,” based upon its
technical merits, be sustained upon examination by the appropriate taxing
authority. The second step requires the tax position to be measured at the
largest amount of tax benefit that is greater than 50 percent likely of being
realized upon ultimate settlement. In addition, previously recognized benefits
from tax positions that no longer meet the new criteria would no longer be
recognized. The application of this Interpretation will be considered a change
in accounting principle with the cumulative effect of the change recorded to the
opening balance of retained earnings in the period of adoption. This
Interpretation was effective for the Company on January 1, 2007. Adoption
of this new standard did not have a material impact on our financial position,
results of operations or cash flows.





F-9
 
 BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARY
 (A
DEVELOPMENT-STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








Fair Value of Financial
Instruments





Risks and
Uncertainties





The Company’s operations are
subject to new innovations in product design and function. Significant technical
changes can have an adverse effect on product lives. Design and development of
new products are important elements to achieve and maintain profitability in the
Company’s industry segment. The Company may be subject to federal, state and
local environmental laws and regulations. The Company does not anticipate
expenditures to comply with such laws and does not believe that regulations will
have a material impact on the Company’s financial position, results of
operations, or liquidity. The Company believes that its operations comply, in
all material respects, with applicable federal, state, and local environmental
laws and regulations.





Concentrations of Credit
Risk





The
Company maintains its cash accounts in a commercial bank and in an institutional
money-market fund account. The total cash balances held in a commercial bank are
secured by the Federal Deposit Insurance Corporation (“FDIC”) up to $100,000. At
times, the Company has cash deposits in excess of federally insured limits. In
addition, the Institutional Funds Account is insured through the Securities
Investor Protection Corporation (“SIPC”) up to $100,000. At times, the Company
has cash deposits in excess of federally and institutional insured
limits.





Loss per Common
Share





The
Company presents basic loss per share (“EPS”) and diluted EPS on the face of the
consolidated statement of operations. Basic loss per share is computed as net
loss divided by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur from common
shares issuable through stock options, warrants, and other convertible
securities. For the year ended December 31, 2007 and for the period from March
28, 2006 (Inception) to December 31, 2006, the Company had approximately
3,287,000 and 1,990,000 options and 7,387,000 and 200,000 warrants,
respectively, to purchase shares of common stock that were excluded from the
calculation of diluted loss per share as their effects would have been
anti-dilutive.





Debt Issuance Costs





Debt issuance costs represent costs
incurred related to the Company’s senior secured convertible note payable. These
costs were amortized over the term of the note using the effective interest
method and expensed upon conversion of senior secured convertible note (Note
5).





Share-Based Payments





The
Company accounts for stock options issued to employees and consultants under
SFAS No. 123(R), “Share-Based Payment”. Under SFAS 123(R), share-based
compensation cost to employees is measured at the grant date, based on the
estimated fair value of the award, and is recognized as expense over the
employee’s requisite service period.





The Company measures compensation
expense for its non-employee stock-based compensation under EITF No. 96-18
“Accounting for Equity Instruments that are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services” (“EITF 96-18”).
The fair value of the option issued or committed to be issued is used to measure
the transaction, as this is more reliable than the fair value of the services
received. The fair value is measured at the value of the Company’s common stock
on the date that the commitment for performance by the counterparty has been
reached or the counterparty’s performance is complete. The fair value of the
equity instrument is charged directly to stock-based compensation expense and
credited to additional paid-in capital.





New Accounting
Pronouncements





In September 2006, the FASB issued SFAS
157, “Fair Value Measurements,” to increase consistency and comparability in
fair value measurements by defining fair value, establishing a framework for
measuring fair value in generally accepted accounting principles, and expanding
disclosures about fair value measurements. SFAS 157 emphasizes that fair
value is a market-based measurement, not an entity-specific measurement. It
clarifies the extent to which fair value is used to measure recognized assets
and liabilities, the inputs used to develop the measurements, and the effect of
certain measurements on earnings for the period.
SFAS 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and is applied on a prospective basis. On February 6,
2008, the FASB announced it will issue a FASB Staff Position (FSP) to allow a
one-year deferral of adoption of SFAS 157 for nonfinancial assets and
nonfinancial liabilities that are recognized at fair value on a nonrecurring
basis. The FSP will also amend SFAS 157 to exclude SFAS 13, “Accounting for
Leases,” and its related interpretive accounting pronouncements. The FSP is
expected to be issued in the near future. The Company is currently assessing the
impact of SFAS 157 on its consolidated financial position, results of operations
or cash flows.





F-10
 
 BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARY
 (A
DEVELOPMENT-STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS







In February 2007, the FASB issued SFAS
159, “The Fair Value Option for Financial Assets and Financial Liabilities,”
which is an elective, irrevocable election to measure eligible financial
instruments and certain other assets and liabilities at fair value on an
instrument-by-instrument basis. The election may only be applied at specified
election dates and to instruments in their entirety rather than to portions of
instruments. Upon initial election, the entity reports the difference between
the instruments’ carrying value and their fair value as a cumulative-effect
adjustment to the opening balance of retained earnings. At each subsequent
reporting date, an entity reports in earnings, unrealized gains and losses on
items for which the fair value option has been elected. SFAS 159 is effective
for financial statements issued for fiscal years beginning after November 15,
2007, and is applied on a prospective basis. Early adoption of SFAS 159 is
permitted provided the entity also elects to adopt the provisions of SFAS 157 as
of the early adoption date selected for SFAS 159. The Company is currently
evaluating the provisions of SFAS 159 at this time.





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141(R)”). SFAS 141(R) expands the definition of a business
combination and requires the fair value of the purchase price of an acquisition,
including the issuance of equity securities, to be determined on the acquisition
date. SFAS141(R) also requires that all assets, liabilities, contingent
considerations, and contingencies of an acquired business be recorded at fair
value at the acquisition date. In addition, SFAS 141(R) requires that
acquisition costs generally be expensed as incurred, restructuring costs
generally be expensed in periods subsequent to the acquisition date, changes in
accounting for deferred tax asset valuation allowances be expensed after the
measurement period, and acquired income tax uncertainties be expensed after the
measurement period. SFAS 141(R) is effective for fiscal years beginning after
December 15, 2008 with early adoption prohibited. The Company is currently
assessing the impact of SFAS 157 on its consolidated financial position, results
of operations or cash flows.





NOTE
3 – DEVELOPMENT CONTRACTS





Department
of Energy Award 1





In February 2007, the Company was
awarded a grant for up to $40 million from the U.S. Department of Energy’s
(“DOE”) cellulosic ethanol grant program to develop a solid waste bio-refinery
project at a landfill in Southern California.





During October 2007, the Company
finalized Award 1 for a total approved budget of just under $10,000,000 with the
DOE. This award is a 60%/40% cost share, whereby 40% of approve costs may be
reimbursed by the DOE pursuant to the total $40 million award announced in
February 2007. As of December 31, 2007, the Company has not recorded a
receivable related to the DOE contract as it cannot be readily estimated due to
the uncertainty of the allowable reimbursables and the reimbursable
period.





California
Energy Commission




In March 2007, the Company was selected
to receive an award of approximately $1,000,000 in funding from the California
Energy Commission (“CEC”). After careful review and consideration of the CEC
Grant Agreement, in January 2008, the Company determined it would be to the best
interest of its shareholders to decline the acceptance of the grant. The terms
under which the Company would have received the grant come at a premium and
clouds otherwise clear ownership structures of the Company’s technology and its
commercial projects.  When compared to other available funding sources
this presents difficulties to the Company’s ongoing fund raising activities with
private parties. Thus, the Company believes it would not be the best interest of
their shareholders to execute the agreement.








F-11
 
 BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARY
 (A
DEVELOPMENT-STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
4 – PROPERTY AND EQUIPMENT





Property and Equipment consist of the
following:





December 31,
      2007Land
            
            $
            109,108Furniture and
      fixtures
            
            
            35,629Office
      equipment
            
            
            6,676151,413Accumulated
      depreciation
            
            
            (406
            )$
            151,007





Purchase of Lancaster
Land





On
November 9 2007, the Company purchased approximately 10 acres of land in
Lancaster, California for approximately $109,000, including certain site
surveying and other acquisition costs. The Company intends to use the land for
the construction of their first pilot refinery plant.





NOTE 5 – NOTES
PAYABLE





Convertible
Notes Payable





On July 13, 2007, the Company issued
several convertible notes aggregating a total of $500,000 with eight accredited
investors including $25,000 from the Company’s Chief Financial
Officer.  Under the terms of the notes, the Company is to repay any
principal balance and interest, at 10% per annum within 120 days of the
note.  The holders also receive warrants to purchase common stock at
$5.00 per share. The warrants vest immediately and expire in five years. The
total warrants issued pursuant to this transaction were 200,000 on a pro-rata
basis to investors. The convertible promissory notes are only convertible into
shares of the Company’s common stock in the event of a default. The conversion
price is determined based on one third of the average of the last-trade prices
of the Company’s common stock for the ten trading days preceding the default
date.





The fair value of the warrants was
$990,367 as determined by the Black-Scholes option pricing model using the
following weighted-average assumptions: volatility of 113%, risk-free interest
rate of 4.94%, dividend yield of 0%, and a term of five
years.





The proceeds were allocated between the
convertible notes payable and the warrants issued to the
convertible  note holders based on their relative fair values and
resulted in $167,744 being allocated to the convertible notes and $332,256
allocated to the warrants. The amount allocated to the warrants resulted in a
discount to the convertible notes.  The Company is amortizing the
discount over the term of the convertible notes. During the year ended December
31, 2007, the Company amortized $332,256 of the discount to interest
expense.





In accordance with EITF 98-05
“Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios”, the Company calculated the value of
the beneficial conversion feature to be approximately $332,000 of which $167,744
was allocated to the convertible notes. However, since the convertible notes are
only convertible upon a contingent event, the value will not be recorded until
such event is triggered.





On
November 7, 2007, the Company re-paid the 10% convertible promissory notes
totaling approximately $516,000 including interest of approximately
$16,000.  This included approximately $800 of accrued interest to the
Company’s Chief Financial Officer.








F-12
 
 BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARY
 (A
DEVELOPMENT-STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





Senior
Secured Convertible Notes Payable
 
 On August 21, 2007, the Company issued
senior secured convertible notes aggregating a total of $2,000,000 with two
institutional accredited investors.  Under the terms of the notes, the
Company is to repay any principal balance and interest,





The fair value of the warrants was
approximately $3,500,000 as determined by the Black-Scholes option pricing model
using the following weighted-average assumptions: volatility of 118%, risk-free
interest rate of 4.05%, dividend yield of 0% and a term of three
years.  The proceeds were allocated between the senior secured
convertible notes and the warrants issued to the convertible note holders based
on their relative fair values and resulted in $728,571 being allocated to the
senior secured convertible promissory notes and $1,279,429 allocated to the
warrants. The resulting discount was to be amortized over the life of the
notes.





In accordance with EITF 98-05
“Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios”, as amended by EITF 00-27, the
Company calculated the value of the beneficial conversion feature to be
approximately $1,679,000 of which approximately $728,000 was allocated to the
beneficial conversion feature resulting in 100% discount to the convertible
promissory notes. During the year ended December 31, 2007, the Company amortized
approximately $312,000 of the discount related to the warrants and beneficial
conversion feature to interest expense and $1,688,000 to loss on extinguishment,
see below for discussion.





In addition, the Company entered into a
registration rights agreement with the holders of the senior secured convertible
notes agreement whereby the Company is required to file an initial registration
statement on Form SB-2 or Form S-3 with the Securities and Exchange Commission
in order to register the resale of the maximum amount of common stock underlying
the secured convertible notes within 120 days of the Exchange Agreement
(December 19, 2007).  The registration statement was filed with the
SEC on December 19, 2007.  The registration statement must then be
declared effective no later than 90 calendar days (March 18, 2008), in the event
of a full or no review by the Securities and Exchange Commission, days from the
initial filing date.





In the event that the Company fails to
have the registration statement declared effective by the SEC by the dates
described above, or fails to maintain on the registration statement the
effectiveness of the registration statement thereafter, then the Company must
pay the Holders an amount equal to 2% of the aggregate purchase price paid by
each Holder, for each month the registration statement remains
uncured.  Liquidated damages cannot exceed 15% of the face amount of
the senior secured convertible notes.  No accrual has been made to the
accompanying financial statements as management does not believe that such
damages are probable of being incurred.





Modification
of Conversion Price and Warrant Exercise Price on Senior Secured Convertible
Note Payable





On December 3, 2007, the Company
modified the conversion price into common stock on its outstanding senior
secured convertible notes from $4.21 to $2.90 per share. The Company also
modified the exercise price of the Class A and B warrants issued with
convertible notes from $5.48 and $6.32, respectively, to $2.90 per
share.





In
accordance with EITF 96-19 and EITF 06-6, the Company recorded an extinguishment
loss of approximately $2,818,000 for the modification of the conversion price as
the fair value of the conversion price immediately before and after the
modification was greater than 10% of the carrying amount of the original debt
instrument immediately prior to the modification.  The loss on
extinguishment was determined based on the difference between the fair value of
the new instruments issued and the previous carrying value of the convertible
debt at the date of extinguishment. Upon modification, the carrying amount of
the senior secured convertible notes payable of $2,000,000 and accrued interest
of approximately $33,000 was converted into a total of 700,922 shares of common
stock at $2.90 and $2.96 per share, respectively.  Prior to the
modification, during the quarter ended September 30, 3007, the Company satisfied
its interest obligation of approximately $20,000 by issuing 3,876 shares of the
Company’s common stock at $4.48 per share in lieu of cash.





F-13
 
 BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARY
 (A
DEVELOPMENT-STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





The extinguishment loss and non-cash
interest expense for the warrants was determined using the Black-Scholes option
pricing model using the following assumptions: volatility of 122.9%, expected
life of 4.72 years, risk free interest rate of 3.28%, market price per share of
$3.26, and no dividends.





Debt Issuance Costs




Debt issuance fees and expenses of
approximately $207,000 have been incurred in connection with the senior secured
convertible note. These fees consist of a cash payment of $100,000 and the
issuance of warrants to purchase 23,731 shares of common stock. The warrants
have an exercise price of $5.45, vest immediately and expire in five years. The
warrants were valued at approximately $107,000 as determined by the
Black-Scholes option pricing model using the following weighted-average
assumptions: volatility of 118%, risk-free interest rate of 4.05%, dividend
yield of 0% and a term of five years. These costs were amortized over the term
of the note using the effective interest method and expensed upon conversion of
senior secured convertible note.  During the year ended December 31,
2007, the Company amortized approximately $32,000 of the debt issuance costs to
interest expense and approximately $175,000 to loss on extinguishment, see above
for further discussion.





NOTE
6 - COMMITMENTS AND CONTINGENCIES





Employment
Agreements




On
June 27, 2006, the Company entered into employment agreements with three key
employees. The employment agreements are for a period of three years, with
prescribed percentage increases beginning in 2007 and can be cancelled upon a
written notice by either employee or employer (if certain employee acts of
misconduct are committed). The total aggregate annual amount due under the
employment agreements is approximately $520,000 per year.




Board
of Director Arrangements




On July 7, 2007, the Company entered
into an agreement with two Directors to serve on the Company’s
Board.  Under the terms of the agreement the individuals will receive
annual compensation in the amount of $5,000 and a one-time grant of 5,000 shares
of the Company’s common stock.  In addition, the Company renewed three
of its existing Directors appointment, issued 1,000 shares to each and paid
$5,000 to the one outside member.  Pursuant to the Board of Director
agreements, the Company’s “in-house” board members (CEO and Vice-President)
waived their annual cash compensation of $5,000.  The value of the
common stock granted was determined to be approximately $66,000 based on the
fair market value of the Company’s common stock of $5.07 on the date of the
grant.  During the year ended December 31, 2007, the Company expensed
approximately $81,000 related to the agreements.




On
June 27, 2006, the Company entered into an agreement with four individuals to
join the Company’s board of directors. Under the terms of the agreement the
individuals will receive annual compensation in the amount of $5,000 and
received a one-time grant of 5,000 shares of the Company’s common
stock.  The value of the common stock granted was determined to be
approximately $67,000 based on the estimated fair market value of the Company’s
common stock over a reasonable period of time near the date of
grant.  During the year
ended December 31, 2006, the Company expensed approximately $87,000 related to
the agreements.




Investor Relations
Agreements





On November 9, 2006, the Company entered
into an agreement with a consultant. Under the terms of the agreement, the
Company is to receive investor relations and support services in exchange for a
monthly fee of $7,500, 150,000 shares of common stock, warrants to purchase
200,000 shares of common stock at $5.00 per share, expiring in five years, and
the reimbursement of certain travel expenses. The common stock and warrants
vested in equal amounts on November 9, 2006, February 1, 2007, April 1, 2007 and
June 1, 2007. The Company accounted for the agreement under the provisions of
EITF 96-18.





At
December 31, 2006, the consultant was vested in 37,500 shares of common
stock.  The shares were valued at $112,000 based upon the closing
market price of the Company’s common stock on the vesting date. The warrants
were valued on the vesting date at $100,254 based on the Black-Scholes option
pricing model using the following assumptions: volatility of 88%,
expected life of five years, risk free interest rate of 4.75% and no dividends.
The value of the common stock and warrants was recorded in general and
administrative expense on the accompanying statement of
operations.







F-14
 
 BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARY
 (A
DEVELOPMENT-STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS







The
Company revalued the shares on February 1, 2007, vesting date, and recorded an
additional adjustment of $138,875. On of February 1, 2007 the warrants were
revalued at $4.70 per share based on the Black-Scholes option pricing method
using the following assumptions: volatility of 102%, expected life of five
years, risk free interest rate of 4.96% and no dividends. The Company recorded an
additional expense of $158,118 related to these vested warrants.





On
March 31, 2007, the fair value of the vested common stock issuable under the
contract based on the closing market price of the Company’s common stock was
$7.18 per share and thus expensed $269,250. As of March 31, 2007, the Company
estimated the fair value of the vested warrants issuable under the contract to
be $6.11 per share. The warrants were valued on March 31, 2007 based on the
Black-Scholes option pricing model using the following assumptions: volatility
of 114%, expected life of five years, risk free interest rate of 4.58% and no
dividends. The Company recorded an additional estimated expense of approximately
$305,000 related to the remaining unvested warrants.





The Company revalued the shares on June
1, 2007, vesting date, and recorded an additional adjustment of $234,375. On of
June 1, 2007 the warrants were revalued at $5.40 per share based on the
Black-Scholes option pricing method using the following assumptions: volatility
of 129%, expected life of four and a half years, risk free interest rate of
4.97% and no dividends. The Company recorded an additional expense of $269,839
related to these vested warrants during the three months ended June 30,
2007.





During the year ended December 31, 2007,
total compensation expense related to the common stock and warrants was $642,500
and $733,264, respectively.


.


On
December 18, 2006, the Company entered into a consulting agreement with two
individuals.  Each consultant shall support the strategic, financial
and market objectives of the Company.  Under the terms of the
agreement each consultants received 20,000 restricted shares of the Company’s
common stock.  The value of each of the individuals common stock was
determined to be approximately $73,000 based on the closing market price of the
Company’s common stock on the date of the agreement and was expensed to general
and administrative expenses on the accompanying statement of operations. The
shares vested immediately and are not at risk for forfeiture.




Professional Services
Agreement




On February 26, 2007, the Company
entered into an agreement with an engineering firm, whereby the engineering firm
will prepare a design basis for a pilot facility comprising a capacity of 2.5 to
9 million gallons per year as specified by the Company, incorporating cellulosic
ethanol process technology and the Arkenol Technology. As of December 31, 2007,
the Company has incurred total costs of $970,000 of which all were expensed
under project development on the accompanying statement of
operations.





NOTE 7 -STOCKHOLDERS’
EQUITY





Founders
Shares





In March 2006, upon incorporation
BlueFire Ethanol, Inc. issued 10,000 shares of $1.00 par value common stock to
various individuals. The shares were recorded at their par value of $10,000 and
expensed. In connection with the reverse acquisition, as discussed in Note 2,
these individuals received an aggregate of 17,000,000 shares of Sucre’s common
stock with a par value of $0.001 per share. At the time of the transaction,
BlueFire Ethanol, Inc. did not have sufficient paid-in capital to reclass the
additional par value of the common shares to common stock, thus the Company
expensed an additional $7,000 during the period from March 28, 2006 (Inception)
to December 31, 2006. The amounts were recorded as general and administrative
expense on the accompanying statement of operations for the period from March
28, 2006 (Inception) to December 31, 2006..





F-15
 
 BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARY
 (A
DEVELOPMENT-STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





Acquisition Costs





Financing Prior to
Reverse Acquisition.





Prior to the reverse acquisition, Sucre
entered into an agreement with an investor for the sale of 3,000,000 shares of
the Sucre’s common stock for gross proceeds of $1,000,000. The previous
management of Sucre erroneously issued 4,000,000 shares of Sucre’s common stock
to the investor. To date, the excess shares of 1,000,000 have not been returned
to the transfer agent. The Company has demanded the return of the 1,000,000 and
is actively pursuing every possible channel to get the shares returned. Since
the Company cannot predict the ultimate outcome, the 1,000,000 shares have been
accounted for as outstanding and included in the common shares retained by Sucre
shareholders. At the time of the reverse acquisition, Sucre had $690,000 in cash
as reflected in the accompanying statements of stockholders
deficit.





Amended
and Restated 2006 Incentive and Nonstatutory Stock Option Plan





On December 14, 2006, the Company
established the 2006 incentive and nonstatutory stock option plan (the “Plan”).
The Plan is intended to further the growth and financial success of the Company
by providing additional incentives to selected employees, directors, and
consultants. Stock options granted under the Plan may be either “Incentive Stock
Options,” or “Nonstatutory Options” at the discretion of the Board of Directors.
The total number of shares of Stock which may be purchased through exercise of
Options granted under this Plan shall not exceed ten million (10,000,000)
shares, they become exercisable over a period of no longer than five (5) years
and no less than 20% of the shares covered thereby shall become exercisable
annually.





On
October 16, 2007, the Board reviewed the Plan.  As such, it determined
that the Plan was to be used as a comprehensive equity incentive program for
which the Board serves as the Plan administrator; and therefore added the
ability to grant restricted stock awards under the Plan.





Under
the amended and restated Plan, an eligible person in the Plan may acquire a
proprietary interest in the Company in the form of shares or an option to
purchase shares of the Company’s common stock. The amendment includes certain
previously granted restricted stock awards as having been issued under the
amended and restated Plan. As of December 31, 2007, 3,307,159 options and
113,000 shares have been issued under the plan. As of December 31, 2007,
6,559,841 shares are still issuable under the Plan.





On December 14, 2006, the Company
granted options to purchase 1,990,000 shares of common stock to various
employees and consultants having a $2.00 exercise price. The value of the
options granted was determined to be approximately $4,900,000 based on the
Black-Scholes option pricing model using the following assumptions: volatility
of 99%, expected life of five years, risk free interest rate of 4.73%, market
price per share of $3.05, and no dividends. The Company is currently expensing
the value of the common stock over the vesting period of two years for the
employees under SFAS 123 (R). For non-employees the Company is revaluing the
fair market value of the options at each reporting period under the provisions
of EITF 96-18.





On December 20, 2007, the Company
granted options to purchase 1,038,750 shares of the Company’s common stock to
various employees and consultants having an exercise price of $3.20 per share.
In addition, on the same date, the Company granted its President and Chief
Executive Officer 250,000 and 28,409 options to purchase shares of the Company’s
common stock having an exercise price of $3.20 and $3.52,
respectively.  The aggregate value of the options granted on this date
was determined to be approximately $3,482,000 based on the Black-Scholes option
pricing model using the following assumptions: volatility of 122.9%, expected
life of five years, risk free interest rate of 3.09%, market price per share of
$3.20, and no dividends. Of the total 1,317,159 options granted on December 20,
2007, 739,659 vested immediately 27,500 issued to consultants vest monthly over
a one year period, and 550,000 of the options vest contingent upon two future
events.  In connection with the initial options, the Company expensed
approximately $2,082,000.  Management’s belief is that the event is
probable to occur and is within their control, and thus accounted for the
remaining vesting under SFAS 123(R) by straight-lining the remaining
compensation through the expected date on which the future event is to
occur.  Management believes that future date will be June 30, 2008.
The Company accounts for the stock options to consultants under the provisions
of EITF 96-18.





F-16
 
 BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARY
 (A
DEVELOPMENT-STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





In accordance with EITF 96-18, as of
December 31, 2007, the options awarded to consultants under the 2006 stock
option grant were re-valued using the Black-Scholes option pricing model with
the following assumptions: volatility of 124%, remaining expected life of four
years, risk free interest rate of 3.05% and no dividends.





In accordance with EITF 96-18, as of
December 31, 2007, the options awarded to consultants under the 2007 stock
option grant were re-valued using the Black-Scholes option pricing model with
the following assumptions: volatility of 124.0%, expected life of five years,
risk free interest rate of 3.05% and no dividends.





In connection with the Company’s 2007
and 2006 stock option awards, during the year ended December 31, 2007 and for
the period from March 28, 2006 (Inception) to December 31, 2006, the Company
amortized stock-based compensation, including consultants, of approximately
$2,452,000 and $112,000 to general and administrative expenses and $2,287,000
and $2,500 to project development expenses, respectively. Related to these the
2007 and 2006 options awards, the Company will record estimated future
compensation expense of approximately $3,721,000 during the year ending December
31, 2008.





A summary of the status of the stock
option grants under the Plan as of the year ended December 31, 2007 and changes
during this period is presented as follows:





Options
            
            
            Weighted Average Exercise
      Price
            
            
            Weighted Average Remaining
      Contractual Term (Years)
            
            
            Aggregate Intrinsic
      ValueOutstanding January 1,
      2007
            
            
            1,990,000
            
            
            $
            2.00Granted during the
      year
            
            
            1,317,159
            
            
            
            3.21Exercised during the
      year
            
            
            (20,000
            )
            
            
            2.00Outstanding December 31,
      2007
            
            
            3,287,159
            
            
            $
            2.48
            
            
            
            4.40
            
            
            $
            4,162,847Options exercisable
      at
              December 31,
      2007
            
            
            1,724,659
            
            
            $
            2.52
            
            
            
            4.43
            
            
            $
            2,121,472Options expected to vest
      at
              December 31,
      2007
            
            
            3,287,159
            
            
            $
            2.48
            
            
            
            4.40
            
            
            $
            4,162,847







The total amount of cash received from
the exercise of stock options and the total intrinsic value of options exercised
during the year ended December 31, 2007, was $40,000 and $35,000,
respectively.




Private
Offerings of Common Stock




On
January 5, 2007, the Company completed a private offering of its stock, and
entered into subscription agreements with four accredited
investors.  In this offering, the Company sold an aggregate of 278,500
shares of the Company’s common stock at a price of $2.00 per share for total
proceeds of $557,000.  The shares of common stock were offered and
sold to the investors in private placement transactions made in reliance upon
exemptions from registration pursuant to Section 4(2) under the Securities Act
of 1933. In addition, the Company paid $12,500 in cash and issued 6,250 shares
of their common stock as a finder’s fee.





On
December 3, 2007 and December 14, 2007, the Company issued an aggregate of
5,740,741 shares of common stock at $2.70 per share and issued warrants to
purchase 5,740,741 shares of common stock for gross proceeds of
$15,500,000.  The warrants have an exercise price of $2.90 per share
and expire five years from the date of issuance.





The value of the warrants was determined
to be approximately $15,968,455 based on the Black-Scholes option pricing model
using the following assumptions: volatility of 122.9%, expected life of five (5)
years, risk free interest rate of 3.28%, market price per share of $3.26, and no
dividends.  The relative fair value of the warrants did not
have an impact on the financial statements as they were issued in connection
with a capital raise and recorded as additional paid-in
capital.





F-17
 
 BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARY
 (A
DEVELOPMENT-STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








The
warrants are subject to “full-ratchet” anti-dilution protection in the event the
Company (other than excluded issuances, as defined) issues  any
additional shares of stock, stock options, warrants or any securities
exchangeable into common stock at a price of less than $2.90 per share. If the
Company issues securities for less $2.90 per share then the exercise price for
the warrants shall be adjusted to equal to the lower price.





In
connection with the capital raise, the Company paid $1,050,000 to placement
agents, $90,000 in legal fees and issued warrants for the purchase of 222,222
shares of common stock. The warrants were valued at $618,133 based on the
Black-Scholes assumptions above as recorded as as a cost of the capital raised
by the Company.





Issuance
of Common Stock related to Employment Agreements




In January 2007, the Company issued
10,000 shares of common stock to an employee in connection with an employment
agreement.  The shares were valued on the initial date of employment
at $40,000 based on the closing market of the Company’s common stock on that
date.





On February 12, 2007, the Company
entered into an employment agreement with a key employee, and simultaneously
entered into a consulting agreement with an entity controlled by such employee;
both agreements were effective March 16, 2007. Under the terms of the consulting
agreement, the consulting entity received 50,000 restricted shares of the
Company’s common stock. The common stock was valued at approximately $275,000
based on the closing market price of the Company’s common stock on the date of
the agreement. The shares vest in equal quarterly installments on February 12,
2007, June 1, December 1, and December 1, 2007. The Company amortized the entire
fair value of the common stock of $275,000 over the vesting period during the
year ended December 31, 2007.





Private
Placement Agreements




During
the year ended December 31, 2007, the Company entered into various placement
agent agreements, whereby payments are only ultimately due if capital is raised.
As of December 31, 2007, no other amounts are due under the
agreements.





Warrants
Outstanding




A summary of the status of the warrants
as of the year ended December 31, 2007 and changes during this period is
presented as follows:





Warrants
            
            
            Weighted
      Average Exercise Price
            
            
            Weighted
      Average Remaining Contractual Term
              (Years)Outstanding
      January 1, 2007
            
            
            200,000
            
            
            $
            5.00Issued
      during the year
            
            
            7,186,694
            
            
            
            2.96Outstanding
      and exercisable at December 31, 2007
            
            
            7,386,694
            
            
            $
            3.02
            
            
            
            4.60





F-18
 
 BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARY
 (A
DEVELOPMENT-STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE 8 -RELATED PARTY
TRANSACTIONS
 
 Technology Agreement with Arkenol,
Inc.





Asset Transfer Agreement with Ark
Entergy, Inc.





On March 1, 2006, the Company entered
into an Asset Transfer and Acquisition Agreement with ARK Energy, Inc. (“ARK
Energy”), which is owned (50%) by the Company’s CEO. ARK Energy has its own
management and board separate and apart from the Company. Based upon the terms
of the agreement, ARK Energy transferred certain rights, assets, work-product,
intellectual property and other know-how on project opportunities that may be
used to deploy the Arkenol technology (as described in the above paragraph). In
consideration, the Company has agreed to pay a performance bonus of up to
$16,000,000 when certain milestones are met. These milestones include
transferee’s project implementation which would be demonstrated by start of the
construction of a facility or completion of financial closing whichever is
earlier. The payment is based on ARK Energy’s cost to acquire and develop 19
sites which are currently at different stages of development. As of December 31,
2007, the Company had not incurred any liabilities related to the
agreement.





Related Party Promissory
Note





In addition, on December 12, 2006 the
Company entered into a $91,000 promissory note with the Company’s Chairman, CEO
and majority shareholder. Under the terms of the note, the Company is to repay
any principal balance within 30 days of receiving a qualified investment
financing and a mandatory 10% interest fee of $9,100. In January 2007 the
Company borrowed an additional $25,000 and incurred a 10% interest fee of
$2,500.  In January 2007, the Company paid back loan amounts of
$116,000 and accrued interest of $11,600.





Related Party Line of
Credit





In March 2007, the Company obtained a
line of credit in the amount of $1,500,000 from its Chairman/Chief Executive
Officer and majority shareholder to provide additional liquidity to the Company
as needed. Under the terms of the note, the Company is to repay any principal
balance and interest, at 10% per annum, within 30 days of receiving qualified
investment financing of $5,000,000 or more. As of December 31, 2007, the Company
repaid its outstanding balance on line of credit of approximately $631,000 which
included interest of $37,800. As of December 31, 2007 $1,500,000 was available
on the line of credit.





Purchase of Property and
Equipment





During the year ended December 31, 2007,
the Company purchased various office furniture and equipment from ARK Energy
costing approximately $39,000 (see Note 3).





Notes Payable





As mentioned in Note 3, on July 13,
2007, the Company issued several convertible notes aggregating a total of
$500,000 with eight accredited investors including $25,000 invested by the
Company’s Chief Financial Officer.





F-19
 
 BLUEFIRE
ETHANOL FUELS, INC. AND SUBSIDIARY
 (A
DEVELOPMENT-STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE 9 – INCOME
TAXES





The Company’s deferred tax assets
consist solely of net operating loss carry forwards of approximately
$3,347,000.  For federal tax purposes these carry forwards expire
beginning 2026 and for the State of California purposes they expire beginning
2011. A full valuation allowance has been placed on 100% of the Company’s
deferred tax assets as it cannot be determined if the assets will be ultimately
used.  During the year ended December 31, 2007 and for the period from
March 28, 2006 (Inception) to December 31, 2006, the valuation allowance
increased by $3,002,000 and $345,000, respectively.





In addition, the Company is not current
in their federal and state income tax filings due to previous delinquencies bySucreprior to the reverse acquisition. The
Company is currently assessing how delinquent the filings are. However, the
effect of non filing is not expected to be significant, asSucrehas not had active operations for a
significant period of time.





F-20





ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE




None.




ITEM
8A. CONTROLS AND PROCEDURES




EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES




As
required by SEC Rule 15d-15(b), our Chief Executive Officer and Chief Financial
Officer carried out an evaluation under the supervision and with the
participation of our management, of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Exchange Act
Rule 15d-14 as of the end of the period covered by this report. Based on the
foregoing evaluation, we have concluded that our disclosure controls and
procedures are effective in timely alerting them to material information
required to be included in our periodic SEC filings and to ensure that
information required to be disclosed in our periodic SEC filings is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, to allow timely decisions regarding required disclosure
as a result of the deficiency in our internal control over financial reporting
discussed below.




During
the fiscal year ended December 31, 2007, the Company restated its financial
results for the quarter ended June 30, 2007.  The restatement was
related to the manner in which the Company had accounted for the costs related
to the construction of their ethanol plant.  Our Chief Executive
Officer and Chief Financial Officer believe that our disclosure controls and
procedures were not effective at the “reasonable assurance” level as of the end
of the quarter ended June 30, 2007 report since they resulted in a need to
restate such financial statements and therefore there existed a material
weakness associated with accounting and an inability to maintain effective
internal control over financial reporting.  However, subsequent to the
quarter ended June 30, 2007, and as noted above, as of the end of the period
ended December 31, 2007, management concludes that it has rectified the material
weakness in accounting.




Our
management does not expect that our disclosure controls and procedures or our
internal control over financial reporting will necessarily prevent all fraud and
material error. Our disclosure controls and procedures are designed to provide
reasonable assurance of achieving our objectives and our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and
procedures are effective at that reasonable assurance level. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the internal control. The design of
any system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
Over time, control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may
deteriorate.




ITEM
8A(T). MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING.




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for the company in accordance with as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control
over financial reporting is designed to provide reasonable assurance regarding
the (i) effectiveness and efficiency of operations, (ii) reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles, and (iii)
compliance with applicable laws and regulations.  Our internal
controls framework is based on the criteria set forth in the Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.







F-21





Management’s
assessment of the effectiveness of the small business issuer’s internal control
over financial reporting is as of the year ended December 31, 2007. We believe
that internal control over financial reporting is effective. We have not
identified any, current material weaknesses considering the nature and extent of
our current operations and any risks or errors in financial reporting under
current operations.




This
annual report does not include an attestation report of the company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the SEC that permit the
Company to provide only management’s report in this annual report.




CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING.




There
was no change in our internal control over financial reporting that occurred
during the fiscal quarter ended December 31, 2007, that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.




ITEM 8B. OTHER
INFORMATION




None.







F-22





PART
III




ITEM
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE


GOVERNANCE;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT





The
following table and biographical summaries set forth information, including
principal occupation and business experience, about our directors and executive
officers at December 31, 2007. There is no familial relationship between or
among the nominees, directors or executive officers of the Company.




NAME
            
            AGE
            
            POSITION
            
            OFFICER
      AND/OR DIRECTOR SINCEArnold
      Klann
            
            56
            
            President,
      CEO and Director
            
            June
      2006Necitas
      Sumait
            
            48
            
            Secretary,
      SVP and Director
            
            June
      2006Christopher
      Scott
            
            34
            
            Chief
      Financial Officer
            
            March
      2007John
      Cuzens
            
            57
            
            SVP,
      Chief Technology Officer
            
            June
      2006Chris
      Nichols
            
            41
            
            Director
            
            June
      2006Joseph
      Emas
            
            53
            
            Director
            
            July
      2007Victor
      Doolan
            
            67
            
            Director
            
            July
      2007




The
Company’s directors serve in such capacity until the first annual meeting of the
Company’s shareholders and until their successors have been elected and
qualified. The Company’s officers serve at the discretion of the Company’s Board
of Directors, until their death, or until they resign or have been removed from
office.




There
are no agreements or understandings for any director or officer to resign at the
request of another person and none of the directors or officers is acting on
behalf of or will act at the direction of any other person. The activities of
each director and officer are material to the operation of the Company. No other
person’s activities are material to the operation of the Company.




Arnold
R. Klann – Chairman of the Board and Chief Executive Officer




Mr.
Klann has been our Chairman of the Board and Chief Executive Officer since our
inception in March 2006. Mr. Klann has been President of ARK Energy, Inc. and
Arkenol, Inc. from January 1989 to present. Mr. Klann has an AA from Lakeland
College in Electrical Engineering.




Necitas
Sumait – Senior Vice President and Director




Mrs.
Sumait has been our Director and Senior Vice President since our inception in
March 2006. Prior to this, Mrs. Sumait was Vice President of ARK Energy/Arkenol
from December 1992 to July 2006. Mrs. Sumait has a MBA in Technological
Management from Illinois Institute of Technology and a B.S. in Biology from De
Paul University.




Christopher Scott - Chief Financial
Officer




Mr.
Scott has been our Chief Financial Officer since March 2007. Prior to this, from
2002 to March 2007, Mr. Scott was most recently the CFO/CCO and FinOp of Westcap
Securities, Inc, an NASD Member Broker/Dealer and Investment Bank headquartered
in Irvine, CA. Mr. Scott currently holds the Series 7, 63, 24, 4, 27, 55, and
Series 53 NASD licenses. From 1997 to 2002, Mr. Scott was a General Securities
and Registered Options Principal at First Allied Securities Inc. Mr. Scott
earned his Bachelors Degree in Business Administration, with a concentration in
Finance, from CSU, Fullerton.




John
Cuzens - Chief Technology Officer and Senior Vice President




Mr.
Cuzens has been our Chief Technology Officer and Senior Vice President since our
inception in March 2006. Mr. Cuzens was a Director from March 2006 until
his resignation from the Board of Directors in July 2007.  Prior to
this, he was Director of Projects Wahlco Inc. from 2004 to June 2006. He was
employed by Applied Utility Systems Inc from 2001 to 2004 and Hydrogen Burner
Technology form 1997-2001. He was with ARK Energy and Arkenol from 1991 to 1997
and is the co-inventor on seven of Arkenol’s eight U.S. foundation patents for
the conversion of cellulosic materials into fermentable sugar products using a
modified strong acid hydrolysis process. Mr. Cuzens has a B.S. Chemical
Engineering degree from the University of California at
Berkeley.















Chris
Nichols – Director




Mr.
Nichols has been our Director since our inception in March 2006.  Mr.
Nichols is currently the Chairman of the Board and Chief Executive Officer of
Advanced Growing Systems, Inc. Since 2003 Mr. Nichols was the Senior Vice
President of Westcap Securities’ Private Client Group. Prior to this, Mr.
Nichols was a Registered Representative at Fisher Investments from December 2002
to October 2003. He was a Registered Representative with Interfirst Capital
Corporation from 1997 to 2002. Mr. Nichols is a graduate of California State
University in Fullerton with a B.A. degree in Marketing.




Joseph
Emas – Director




Mr.
Emas is licensed to practice law in Florida, New Jersey and New York. Since
2001, Mr. Emas has been the senior partner of Joseph I. Emas, P.A. Mr. Emas
specializes in securities regulation, corporate finance, mergers and
acquisitions and corporate law. Mr. Emas received his Honors BA at University of
Toronto, Bachelor of Administrative Studies, with distinction, at York
University in Toronto, his JD, cum laude from Nova Southeastern Shepard Broad
Law School and his LL.M. in Securities Regulation at Georgetown University Law
Center. Mr. Emas was an Adjunct Professor of Law at Nova Southeastern Shepard
Broad Law School. Mr. Emas received the William Smith Award, Pro Bono Advocate
for Children in 2000 and the 2006 Child Advocacy Award in Florida and is the
author of “Update of Juvenile Jurisdiction Florida Practice in Juvenile Law.”
Mr. Emas has been a member of the Juvenile Court Rules Committee for the State
of Florida from 1999 through 2006, and currently sits on the Florida Child
Advocacy Committee. Mr. Emas serves on the Board of Directors of HQ Sustainable
Maritime Industries, Inc.




Victor
Doolan – Director




Mr.
Doolan served for approximately three years as president of Volvo Cars North
America until his retirement in March 2005. Prior to joining Volvo, Mr. Doolan
served as the Executive Director of the Premier Automotive Group, the luxury
division of Ford Motor Company from July 1999 to June 2002. Mr. Doolan also
enjoyed a 23-year career with BMW, culminating with his service as President of
BMW of North America from September 1993 to July 1999. Mr. Doolan has worked in
the automotive industry for approximately 36 years.  Mr. Doolan
currently serves on the Board of Directors for Sonic Automotive,
Inc.




Significant
Employee




William
Davis - VP Project Management.




Mr.
Davis is currently Vice President of Project Management for us. Prior to this he
was Director of Power Plant Project Development for Diamond Energy from 2001 to
2006. Prior to this he was VP of Business Development for Oxbow Power. He has
over 30 years in the energy business and was an energy advisor to the Governor
of California. He has been involved in domestic and international power project
development. Mr. Davis is a registered Architect in three states and graduated
from California State University at San Luis Obispo with a Bachelors of
Architecture and a Masters of Science in Architecture.




FAMILY
RELATIONSHIPS




There
are no family relationships among our directors, executive officers, or persons
nominated or chosen by the Company to become directors or executive
officers.




SUBSEQUENT
EXECUTIVE RELATIONSHIPS




There
are no family relationships among our directors and executive officers. No
director or executive officer has been a director or executive officer of any
business which has filed a bankruptcy petition or had a bankruptcy petition
filed against it during the past five years. No director or executive officer
has been convicted of a criminal offense or is the subject of a pending
criminal proceeding during the past five years. No director or executive officer
has been the subject of any order, judgment or decree of any court permanently
or temporarily enjoining, barring, suspending or otherwise limiting his
involvement in any type of business, securities or banking activities during the
past five years. No director or officer has been found by a court to have
violated a federal or state securities or commodities law during the past five
years.















None
of our directors or executive officers or their respective immediate family
members or affiliates are indebted to us.




COMMITTEES
OF THE BOARD OF DIRECTORS






Our
Audit Committee and Compensation Committee is composed of the majority of
independent board members and are also chaired by an independent board
member. Victor Doolan is the Audit Committiee’s financial expert and he
currently serves as the Company’s Chairman for the Audit and Compensation
Committees.







COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT




Section
16(a) of the Exchange Act requires the Company’s directors, executive officers
and persons who beneficially own 10% or more of a class of securities registered
under Section 12 of the Exchange Act to file reports of beneficial ownership and
changes in beneficial ownership with the SEC. Directors, executive officers and
greater than 10% stockholders are required by the rules and regulations of the
SEC to furnish the Company with copies of all reports filed by them in
compliance with Section 16(a).




All
officers, directors, and over 10% shareholders were required to make such
filings when we requested effectiveness on our Form 10-SB early in the 2007
fiscal year.




Based
solely on our review of certain reports filed with the Securities and Exchange
Commission pursuant to Section 16(a) of the Securities Exchange Act of 1934, as
amended, the following reports required to be filed with respect to transactions
in our Common Stock during the fiscal year ended December 31, 2007 were
untimely:




Chris
Nichols, a Director of the Company failed to timely file Form 4s for a number of
sales in an aggregate amount of 10,000 shares of our Common Stock between the
periods of 02/28/2007 and 06/27/2007. The prices on these sales ranged from
$5.40 to $7.15 per share. Mr. Nichols reported these transactions on a Form 4
filed on 08/09/2007.




CODE
OF ETHICS




The
Company has adopted a Code of Ethics that applies to the small business issuer’s
directors, officers and key employees.




BOARD
NOMINATION PROCEDURE




There
have been no material changes to the procedures by which security holders may
recommend nominees to the Company’s board of directors since the Company
provided disclosure on such process on its proxy statement on Form Def14 as
filed on July 27, 2007 with the SEC.













ITEM
10. EXECUTIVE COMPENSATION




2007/2006
SUMMARY COMPENSATION TABLE YEAR







NAME
      AND PRINCIPAL
              POSITION
            YEAR
            
            SALARY($)
            
            
            BONUS($)
            
            
            STOCK
              AWARDS
      (3)
            
            
            OPTIONS
              AWARDS
      ($) (3)
            
            
            NON-
              EQUITYINCENTI
              VE
      PLAN
              COMPENSATION
              ($)
            
            
            CHANGE
              IN
      PENSION
              VALUE
      AND NONQUALIFIED DEFERRED COMPENSATION EARNINGS ($)
            
            
            ALL
      OTHER
              COMPENSATION
              ($)
            
            
            TOTAL
      ($)Arnold
      Klann Director and President
            2007
            
            
            216,583
            
            
            
            51,780
            
            
            
            5,070
            (1)
            
            
            750,519
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,023,9522006
            
            
            113,000
            
            
            
            
            
            
            
            16,750
            (1)
            
            
            2,477,415
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,607,165Necitas
      Sumait Director,
      Secretary and VP
            2007
            
            
            149,500
            
            
            
            51,780
            
            
            
            5,070
            (1)
            
            
            556,521
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            762,8712006
            
            
            78,000
            
            
            
            
            
            
            
            16,750
            (1)
            
            
            1,114,850
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,209,600John
      Cuzens Treasurer and VP
            2007
            
            
            149,500
            
            
            
            51,780
            
            
            
            
            
            
            
            556,521
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            757,8012006
            
            
            75,000
            
            
            
            
            
            
            
            16,750
            (1)
            
            
            1,114,850
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,206,600Christopher
      Scott Chief Financial Officer
            2007
            
            
            86,250
            
            
            
            51,780
            
            
            
            275,001
            (2)
            
            
            556,521
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            969,552Chris
      Nichols Director
            2007
            
            
            7,500
            (5)
            
            
            
            
            
            
            5,070
            (1)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            12,5702006
            
            
            2,500
            
            
            
            
            
            
            
            16,750
            (1)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            73,000
            (4)
            
            
            92,250Joseph
      Emmas Director
            2007
            
            
            5,000
            
            
            
            
            
            
            
            25,350
            (1)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            30,350Victor
      Doolan Director
            2007
            
            
            5,000
            
            
            
            
            
            
            
            25,350
            (1)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            30,350








(1)
            Reflects
      value of shares of restricted common stock received as compensation as
      Director. See notes to consolidated financial statements for
      valuation.


(2)
            Reflects
      value of 50,000 shares of restricted common stock received as compensation
      related to February 2007 employment
agreement.


(3)
            Valued
      based on the Black-Scholes valuation model at the date of grant, see note
      to the consolidated financial
statements.


(4)
            Reflects
      value of consideration received as compensation for consultant
      services.


(5)
            Includes
      partial 2006 compensation of $2,500 paid in
  2007.













2007
GRANTS OF PLAN-BASED AWARDS TABLE







ESTIMATED
      FUTURE PAYOUTS UNDER NON-EQUITY INCENTIVE PLAN AWARDS
              
              ESTIMATED
      FUTURE PAYOUTS UNDER EQUITY INCENTIVE PLAN
  AWARDS
 
 Name
              Grant
      Date
              Approval
      Date
              Number
      of Non-Equity Incentive Plan Units Granted (#)
              Threshold
      ($)
              Target
      ($)
              Maximum
      ($)
              Threshold
      (#)
              Target
      (#)
              Maximum
      (#)
              
              All
      Other Stock Awards: Number of Shares of Stock or Units (#)
              
              
              All
      Other Option Awards: Number of Securities Underlying Options
      (#)
              
              
              Exercise
      or Base Price of Option Awards ($ / SH)
              
              
              Closing
      Price on Grant Date ($ / SH)Arnold
      Klann
              12/20/07
              12/20/07
              
              
              
              
              
              
              
              
              
              
              
              
              250,000
              (1)
              
              $
              3.20
              
              
              $
              3.2028,409
              (2)
              
              $
              3.52
              
              
              $
              3.20Necitas
      Sumait
              12/20/07
              12/20/07
              
              
              
              
              
              
              
              
              
              
              
              
              206,250
              (3)
              
              $
              3.20
              
              
              $
              3.20Christopher
      Scott
              12/20/07
              12/20/07
              
              
              
              
              
              
              
              
              
              50,000
              (4)
              
              
              206,250
              (3)
              
              $
              3.20
              
              
              $
              3.20John
      Cuzens
              12/20/07
              12/20/07
              
              
              
              
              
              
              
              
              
              
              
              
              
              206,250
              (3)
              
              $
              3.20
              
              
              $
              3.20Chris
      Nichols
              NoneJoseph
      Emmas
              NoneVictor
      Doclan
              None




(1)
            50%
      vest immediately, 25% vests on closing remainder of Lancaster Project
      Funding, 25% vests at the start of construction of Lancaster
      Project(2)
            Vested
      immediately(3)
            Of this
      amount, 31,250 vest immediately, of the remaining 175,000 options 50% vest
      immediately, 25% vests on closing remainder of Lancaster Project Funding,
      25% vests at the start of construction of Lancaster
    Project(4)
            Issued
      to E-Info Solutions an entity controlled by Christopher
    Scott













2007
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE











OPTION
      AWARDS
            
            
            
            STOCK
      AWARDSNAME
            NUMBER
      OF
              SECURITIES
              UNDERLYING
              UNEXERCISED
              OPTIONS
              (#)
              EXERCISABLE
            NUMBER
      OF
              SECURITIES
              UNDERLYING
              UNEXERCISED
              OPTIONS
              (#)
              UNEXERCISABLE
            EQUITY
              INCENTIVE
              PLAN
      AWARDS:
              NUMBER
      OF
              SECURITIES
              UNDERLYING
              UNEXERCISED
              UNEARNED
              OPTIONS
              (#)
            OPTION
              EXERCISE
              PRICE
              (5)
            OPTION
              EXPIRATION
              DATE
            NUMBER
      OF
              SHARES
      OR
              UNITS
      OF
              STOCK
      THAT
              HAVE
      NOT
              VESTED
              (#)
            MARKET
              VALUE
      OF
              SHARES
      OR
              UNITS
      OF
              STOCK
      THAT
              HAVE
      NOT
              VESTED
              ($)
            EQUITY
      INCENTIVE
              PLAN
      AWARDS:
              NUMBER
      OF
              UNEARNED
              SHARES,
      UNITS
              OR
      OTHER
              RIGHTS
      THAT
              HAVE
      NOT
              VESTED
              (#)
            EQUITY
      INCENTIVE PLAN AWARDS:
              MARKET
      OR
              PAYOUT
      VALUE
              OF
      UNEARNED
              SHARES,
      UNITS
              OR
      OTHER
              RIGHTS
      THAT
              HAVE
      NOT
              VESTED
              ($)Arnold
      Klann
            500,000
            500,000
            
            2.00
            12/14/1128,409
            -
            
            3.52
            12/20/12125,000
            125,000
            
            3.20
            12/20/12Necitas
      Sumait
            225,000
            225,000
            
            2.00
            12/14/11118,750
            87,500
            
            3.20
            12/20/12John
      Cuzens
            225,000
            225,000
            
            2.00
            12/14/11118,750
            87,500
            
            3.20
            12/20/12Christopher
      Scott
            118,750
            87,500
            
            3.20
            12/20/12Chris
      NicholsJoseph EmmasVictor
      Doolan














2007
OPTION EXERCISES AND STOCK VESTED TABLE





OPTION AWARDS
            STOCK
AWARDS





Number
      of Shares Acquiredon
      Exercise
      (#)
            Value
      Realized on
              Exercise
      ($)
            Number
      of Shares Acquired on Vesting
    (#)
            Value
      Realized on Vesting
      ($)Arnold
      KlannNecitas
      SumaitChristopher
      ScottJohn
      CuzensChris
      NicholsJoseph
      EmmasVictor
      Doclan














2007
PENSION BENEFITS TABLE





NAME
            PLAN
      NAME
            NUMBER
      OF YEARS CREDITED SERVICE
      (#)
            PRESENT
      VALUE OF ACCUMULATED BENEFIT
      ($)
            PAYMENTS DURING LAST
      FISCAL YEAR ($)Arnold
      KlannNecitas
      SumaitChristopher
      ScottJohn
      CuzensChris
      NicholsJoseph
      EmmasVictor
      Doclan

















2007
NONQUALIFIED DEFERRED COMPENSATION TABLE











NAME
            EXECUTIVE
      CONTRIBUTION IN LAST FISCAL YEAR
      ($)
            REGISTRANT
      CONTRIBUTIONS IN LAST FISCAL YEARS
      ($)
            AGGREGATE
      EARNINGS IN LAST FISCAL YEAR
      ($)
            AGGREGATE
      WITHDRAWALS / DISTRIBUTIONS
      ($)
            AGGREGATE
      BALANCE AT LAST FISCAL YEAR-END
      ($)Arnold
      KlannNecitas
      SumaitChristopher
      ScottJohn
      CuzensChris
      NicholsJoseph
      EmmasVictor
      Doclan











2007
DIRECTOR COMPENSATION TABLE








NAME
            FEES
      EARNED OR PAID IN CASH($)
            STOCK
      AWARDS
              ($)
      (1)
            OPTION
      AWARDS
              ($)
            NON-EQUITY
      INCENTIVE PLAN COMPENSATION
              ($)
            CHANGE
      IN PENSION VALUE AND NONQUALIFIED DEFERRED COMPENSATION
      EARNINGS
              ($)
            ALL
      OTHER COMPENSATION
              ($)
            TOTAL($)Arnold
      Klann
            
            5,070
            
            
            
            
            5,070Necitas
      Sumait
            
            5,070
            
            
            
            
            5,070Chris
      Nichols
            7,500
      (2)
            5,070
            
            
            
            
            10,070Joseph
      Emmas
            5,000
            25,350
            
            
            
            
            30,350Victor
      Doclan
            5,000
            25,350
            
            
            
            
            30,350





(1)
            Reflects
      value of shares of restricted common stock received as compensation as
      Director. See notes to consolidated financial statements for
      valuation.


(2)
            Includes
      partial 2006 compensation of $2,500 paid in
  2007.














2007
ALL OTHER COMPENSATION TABLE








NAME
            YEAR
            PERQUISITES
      AND OTHER PERSONAL BENEFITS
              ($)
            TAX
      REIMBURSEMENTS
              ($)
            INSURANCE
      PREMIUMS
              ($)
            COMPANY
      CONTRIBUTIONS TO RETIREMENT AND 401(K) PLANS
              ($)
            SEVERANCE
      PAYMENTS/ACCRUALS($)
            CHANGE
      IN CONTROL PAYMENTS/ACCRUALS($)
            TOTAL
              ($)Arnold
      KlannNecitas
      SumaitChristopher
      ScottJohn
      CuzensChris
      NicholsJoseph
      EmmasVictor
      Doclan





























2007
PERQUISITES TABLE





NAME
            YEAR
            PERSONAL
      USE OF COMPANY CAR/PARKING
            FINANCIAL
      PLANNING LEGAL FEES
            CLUB
      DUES
            EXECUTIVE
      RELOCATION
            TOTAL
      PERQUISITES AND OTHER PERSONAL BENEFITSArnold
      KlannNecitas
      SumaitChristopher
      ScottJohn
      CuzensChris
      NicholsJoseph
      EmmasVictor
      Doclan




















2007
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL TABLE





NAME
            BENEFIT
            BEFORE
      CHANGE IN CONTROL TERMINATION W/O CAUSE OR FOR GOOD REASON
            AFTER
      CHANGE IN CONTROL TERMINATION W/O CAUSE OR GOOD REASON
            VOLUNTARY
      TERMINATION
            DEATH
            DISABILITY
            CHANGE
      IN CONTROLArnold
      Klann
            
            
            
            
            
            Full
      comp. first 2 months, 50% of comp. next 4 monthsNecitas
      Sumait
            
            
            
            
            
            Full
      comp. first 2 months, 50% of comp. next 4 monthsChristopher
      Scott
            
            
            
            
            
            N/AJohn
      Cuzens
            
            
            
            
            
            Full
      comp. first 2 months, 50% of comp. next 4 monthsChris
      Nichols
            
            
            
            
            
            Full
      comp. first 2 months, 50% of comp. next 4 monthsJoseph
      Emmas
            
            
            
            
            
            Full
      comp. first 2 months, 50% of comp. next 4 monthsVictor
      Doclan
            
            
            
            
            
            Full
      comp. first 2 months, 50% of comp. next 4 months














*
List each applicable type of benefit in a separate row, e.g., severance pay,
bonus payment, stock option vesting acceleration, health care benefits
continuation, relocation benefits, outplacement services, financial planning
services or tax gross-ups


























EMPLOYMENT
CONTRACTS




On
June 27, 2006, the Company entered into form employment agreements with three of
its executive officers. The employment agreements are for a period of three
years, with prescribed percentage increases beginning in 2007 and can be
cancelled upon a written notice by either employee or employer (if certain
employee acts of misconduct are committed). The total aggregate annual amount
due under the employment agreements is approximately $520,000.




In
addition, on June 27, 2006, the Company entered into a Directors agreement with
four individuals to join the Company’s board of directors. Under the terms of
the agreement the non-employee Director (Chris Nichols) will receive annual
compensation in the amount of $5,000 and all Directors receive a one time grant
of 5,000 shares of the Company’s common stock. The common shares vested
immediately. The value of the common stock granted was determined to be
approximately $67,000 based on the estimated fair market value of the Company’s
common stock over a reasonable period of time.




In
connection with Christopher Scott’s appointment as the Company’s CFO on March
16, 2007, the Company and Mr. Scott entered into an at-will letter Employment
Agreement containing the following material terms: (i) initial monthly salary of
$7,500, to be raised to $10,000 on the earlier of April 30, 2007 or receipt by
the Company of a qualified investment financing, and (ii) standard employee
benefits; (iii) 50,000 shares of common stock issued throughout the year ended
December 31, 2007 to a consulting Company beneficially owned by
him.




In
addition, on July 9, 2007, the Company entered into a Directors agreement with
two individuals to join the Company’s board of directors. Under the terms of the
agreement these non-employee Directors will receive annual compensation in the
amount of $5,000 and all Directors receive a one time grant of 5,000 shares of
the Company’s common stock. The common shares vest immediately. The value of the
common stock granted was determined to be approximately $50,700 based on the
estimated fair market value of the Company’s common stock over a reasonable
period of time.




ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS




As
of December 31, 2007, our authorized capitalization was 101,000,000 shares of
capital stock, consisting of 100,000,000 shares of common stock, $0.001 par
value per share and 1,000,000 shares of preferred stock, no par value per share.
As of December 31, 2007, there were 28,061,553 shares of our common stock
outstanding, all of which were fully paid, non-assessable and entitled to vote.
Each share of our common stock entitles its holder to one vote on each matter
submitted to the stockholders.




The following table sets forth, as of December 31,
2007, the number of shares of our common stock owned by (i) each person who
is known by us to own of record or beneficially five percent (5%) or more of our
outstanding shares, (ii) each of our directors, (iii) each of our
executive officers and (iv) all of our directors and executive officers as
a group. Unless otherwise indicated, each of the persons listed below has sole
voting and investment power with respect to the shares of our common stock
beneficially owned.




Title
      of Class
            Name
      of Beneficial Owner (1)
            
            Number
      of
              shares
            
            
            Percent
      of
              Class
      (2)Common
            Arnold
      Klann, Chairman and Chief Executive Officer
            
            
            14,335,242
            (4)
            
            
            49.78
            %Common
            Necitas
      Sumait, Senior Vice President and Director
            
            
            1,587,250
            (5)
            
            
            5.58
            %Common
            John
      Cuzens, Chief Technology Officer and Senior Vice President
            
            
            1,584,750
            (6)
            
            
            5.57
            %Common
            Chris
      Scott, Chief Financial Officer
            
            
            217,730
            (7)
            
            
            *Common
            Chris
      Nichols, Director
            
            
            58,000
            
            
            
            *Common
            Victor
      Doolan, Director
            
            
            5,000
            
            
            
            *Common
            Joseph
      Emas, Director
            
            
            5,000
            
            
            
            *Common
            Quercus
      Trust (3)
            
            
            11,111,112
            (8)
            
            
            33.05
            %All
      officers and directors as a group (7 persons)
            
            
            17,792,972
            
            
            
            59.93
            %All
      officers, directors and 5% holders as a group (8 persons)
            
            
            28,904,084
            
            
            
            82.01
            %

















(1)
            Beneficial
      ownership is determined in accordance with Rule 13d-3(a) of the Exchange
      Act and generally includes voting or investment power with respect to
      securities.(2)
            Figures
      may not add up due to rounding of percentages.(3)
            David
      Gelbaum and Monica Chavez Gelbaum are co-trustees of The Quercus
      Trust.  Each of David Gelbaum and Monica Chavez Gelbaum, acting
      alone, has the power to exercise voting and investment control over the
      shares of common stock owned by the Trust.(4)
            Includes
      options to purchase 736,742 shares of common stock vested within sixty
      days of December 31, 2007.(5)
            Includes
      options to purchase 381,250 shares of common stock vested within sixty
      days of December 31, 2007.(6)
            Includes
      options to purchase 381,250 shares of common stock vested within sixty
      days of December 31, 2007.(7)
            Includes
      options and warrants to purchase 128,750 shares of common stock vested
      within sixty days of December 31, 2007.(8)
            Includes
      a warrant to purchase 5,555,556 shares of common
  stock.







SHARE
ISSUANCES/CONSULTING AGREEMENTS




On
January 1, 2007, the Company entered into an employment agreement with a former
consultant to be Vice President of Project Management. Pursuant to the terms of
this agreement, the consultant was issued 10,000 shares of the Company’s
restricted common stock.




On
Feb 13, 2007, the Company entered into a consulting agreement with a corporate
technology consultant. The consultant shall review, comment, and implement as
requested by the Company on any Information Technology rollout. Under the terms
of the agreement consultant will receive 12,500 restricted shares of the
Company’s common stock at the signing of the agreement, 12,500 shares on June 1,
2007, 12,500 shares on September 1, 2007, and 12,500 shares on December 1,
2007.




In
addition, on July 7, 2007, the Company entered into a Directors agreement with
two individuals to join the Company’s board of directors. Under the terms of the
agreement these non-employee Directors will receive
annual  compensation in the amount of $5,000 and all Directors receive
a one time grant of 5,000 shares of the Company’s common stock. The common
shares vest immediately. The value of the common stock granted was determined to
be  approximately $66,000 based on the fair market value of the
Company’s common stock of $5.07 on the date of the  grant. As of
September 30, 2007, the Company expensed all of the costs approximating $81,000
to general and administrative expenses.




STOCK
OPTION ISSUANCES UNDER AMENDED 2006 PLAN




On
December 20, 2007 the Company’s Board of Directors granted the following stock
options to employees and outside consultants as compensation:




DATE
ISSUED:
            OPTIONEE
    NAME
            NUMBER
      OF   OPTIONS
            TYPE
            PRICE
            EXPIRATON
    DATEDecember
      20, 2007
              December
      20, 2007
            Arnold
      Klann, Officer and Director
            28,409
              250,000
            ISO
      (1)
              NSO
      (2)
            $3.52
              $3.20
            December
      20, 2012
              December
      20, 2012December
      20, 2007
              December
      20, 2007
            Necitas
      Sumait, Officer and Director
            31,250
              175,000
            ISO
      (1)
              NSO
      (2)
            $3.20
              $3.20
            December
      20, 2012
              December
      20, 2012December
      20, 2007
              December
      20, 2007
            John
      Cuzens, Officer
            31,250
              175,000
            ISO
      (1)
              NSO
      (2)
            $3.20
              $3.20
            December
      20, 2012
              December
      20, 2012December
      20, 2007
              December
      20, 2007
            Chris
      Scott, Officer
            31,250
              175,000
            ISO
      (1)
              NSO
      (2)
            $3.20
              $3.20
            December
      20, 2012
              December
      20, 2012December
      20, 2007
              December
      20, 2007
            Bill
      Davis, Employee
            31,250
              175,000
            ISO
      (1)
              NSO
      (2)
            $3.20
              $3.20
            December
      20, 2012
              December
      20, 2012December
      20, 2007
              December
      20, 2007
            Rigel
      Stone, Employee
            31,250
              150,000
            ISO
      (1)
              NSO
      (2)
            $3.20
              $3.20
            December
      20, 2012
              December
      20, 2012December
      20, 2007
            Barbi
      Rios, Employee
            5,000
            ISO
      (1)
            $3.20
            December
      20, 2012December
      20, 2007
            Scott
      Olson, Outside Consultant
            10,000
            NSO
      (3)
            $3.20
            December
      20, 2012December
      20, 2007
            Aleshia
      Knickerbocker, Outside Consultant
            2,500
            NSO
      (3)
            $3.20
            December
      20, 2012December
      20, 2007
            Bill
      Orr, Outside Consultant
            10,000
            NSO
      (3)
            $3.20
            December
      20, 2012December
      20, 2007
            Elsa
      Ebro, Outside Consultant
            5,000
            NSO
      (3)
            $3.20
            December
      20, 2012Totals
            
            1,317,159





(1)            
These Incentive Stock Options (“ISO”) vest immediately


(2)            
These Non-Qualified Stock Options (“NSO”) vest as follows:


a.           50%
vest immediately


b.           25%
vest on BlueFire closing remainder of funding for Lancaster Project


c.           25%
vest at start of construction of Lancaster Project


(3)            
These NSO’s vest monthly over 12 months (1/12th monthly vesting)




ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS




On
February 13, 2007, we entered into a consulting agreement with a corporate
technology consulting company, E-Info Solutions, LLC, which entity is controlled
by our Chief Financial Officer, Christopher Scott. The consultant shall review,
comment, and implement as requested by us on any information technology rollout.
Under the terms of the agreement consultant received 12,500 restricted shares of
our common stock at the signing of the agreement and 37,500 shares after
effectiveness of the agreement in equal parts on June 1, 2007, September 1,
2007, and December 1, 2007.




On
March 16, 2007, we obtained a 10% annual interest line of credit in the amount
of $1,500,000 from our Chairman, Chief Executive Officer and majority
stockholder, Arnold Klann, to provide additional liquidity to us as needed.
Under the terms of the note, we are to repay any principal balance and interest
within 30 days of receiving qualified investment financing of $5,000,000 or
more.




On
July 10, 2007, we and Director Chris Nichols mutually terminated our consulting
agreement dated December 21, 2006. The material terms of this agreement were
payment of 20,000 shares of our restricted common stock for Mr. Nichols to
prepare, review and comment on various presentations, press releases, or other
public relations documentation as requested by us, and provide us with capital
market support through its network of portfolio managers, hedge funds, brokers,
market- makers, institutions and other market support professionals and
organizations. Under the terms of the agreement, we had granted Mr. Nichols a
non-exclusive right to deploy our licensed technology on a to be determined
future cellulosic ethanol project. The purpose of the termination of this
agreement is for Mr. Nichols to qualify as an independent member of our Board of
Directors.




On
July 13, 2007, we issued several convertible notes aggregating a total of
$500,000 with eight accredited investors, including $25,000 from our Chief
Financial Officer. Under the terms of the notes, we are required to repay any
principal balance and interest, at 10% per annum within 120 days of the note.
The convertible promissory note is convertible only upon default. The holders
also received warrants to purchase common stock at $5.00 per share. The warrants
vest immediately and expire in five years. The total warrants issued pursuant to
this transaction were 200,000 on a pro-rata basis to investors. The convertible
promissory notes are only convertible into shares of our common stock in the
event of a default. The conversion price is determined based on one third of the
average of the last-trade prices of our common stock for the ten trading days
preceding the default date. On November 7, 2007, we re-paid all of our 10%
convertible promissory notes dated July 13, 2007, to all our private investors,
totaling approximately $516,000, including interest of approximately
$16,000.




DIRECTOR
INDEPENDENCE




The common stock of the Company trades on the
OTCBB, an exchange which currently does not have director independence
requirements. However, our internal corporate governance guidelines provide that
a majority of the Board will be independent.  On an annual basis, each
director and executive officer will be obligated to disclose any transactions
with the Company in which a director or executive officer, or any member of his
or her immediate family, have a direct or indirect material
interest.  Following completion of these disclosures, the Board will
make an annual determination as to the
independence of each director using the current standards for “independence”
that satisfy both the criteria for the Nasdaq and the American Stock
Exchange.


As
of December 31, 2007, the Board determined that the following directors are
independent under these standards (i) Mr. Victor Doolan, (ii) Mr. Chris Nichols,
and (iii) Mr. Joseph Emas.










ITEM
13. EXHIBITS




(a)
The following documents are filed as a part of this Report.




EXHIBIT
              NO.
            DESCRIPTION2.1
            Stock
      Purchase Agreement and Plan of Reorganization dated May 31, 2006, filed
      December 13, 2006.(1)3.1
            Amended
      and Restated Articles of Incorporation dated July 2, 2006, filed December
      13, 2006.(1)3.2
            Amended
      and Restated Bylaws dated May 27, 2006, filed December 13,
      2006.(1)4.1
            Form
      of Promissory Note.(2)4.2
            Form
      of Subscription Agreement.(2)4.3
            Description
      of Promissory Note dated July 13, 2007. (4)4.4
            Form
      of Convertible Promissory Note dated August 22, 2007.
  (5)4.5
            Form
      of Warrant Agreement dated August 22, 2007. (5)4.6
            Stock
      Purchase Agreement dated December 3, 2007. (7)4.7
            Securities
      Purchase Agreement dated December 14, 2007. (7)4.8
            Form
      of Warrant dated December 14, 2007 (7)10.1
            Form
      Directors Agreement, filed December 13, 2006.(1)10.2
            Form
      Executive Employment Agreement, filed December 13,
  2006.(1)10.3
            Arkenol
      Technology License Agreement, dated March 1, 2006, filed December 13,
      2006.(1)10.4
            ARK
      Energy Asset Transfer and Acquisition Agreement, dated March 1, 2006,
      filed December 13, 2006.(1)10.5
            Form
      of the Consulting Agreement. (2)10.6
            Amended
      and Restated 2006 Incentive and Nonstatutory Stock Option Plan, dated
      December 13, 2006 (6)10.7
            CFO
      Employment Agreement (3)14.1
            Code
      of Ethics (9)21.1
            List
      of Subsidiaries (3)24.1
            Power
      of Attorney (8)31.1
            Rule
      13a-14(a)/15d-14(a) certification of Arnold Klann31.2
            Rule
      13a-14(a)/15d-14(a) certification of Christopher Scott32.1
            Certification
      pursuant to 18 USC, section 1350 of Arnold Klann32.2
            Certification
      pursuant to 18 USC, section 1350 of Christopher Scott99.1
            Audit
      Committee Charter (2)99.2
            Compensation
      Committee Charter (2)





(1)
Incorporated by reference to the Company’s Form 10-SB, as filed with the SEC on
December 13, 2006.


(2)
Incorporated by reference to the Company’s Form 10-SB/A, as filed with the SEC
on February 28, 2007.


(3)
Incorporated by reference to the Company’s Form 10-SB/A, as filed with the SEC
on April 17, 2007.


(4)
Incorporated by reference to the Company’s Form 8-K as filed with the SEC on
July 16, 2007.


(5)
Incorporated by reference to the Company’s Form 8-K as filed with the SEC on
August 28, 2007.


(6)
Incorporated by reference to the Company’s Form S-8, as filed with the SEC on
December 17, 2007.


(7)
Incorporated by reference to the Company’s Form 8-K, as filed with the SEC on
December 18, 2007.


(8)
Incorporated by reference to the Company’s Form SB-2, as filed with the SEC on
December 20, 2007.


(9)
Filed herewith.





ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES




a.
Audit Fees: Aggregate fees billed for professional services rendered for the
audit of our annual financial statements for the year ended December 31, 2007
and the period ended December 31, 2006 were approximately $63,000 and $38,000
respectively.













b.
Audit-Related Fees: No fees were billed for assurance and related services
reasonably related to the performance of the audit or review of our financial
statements and not reported under “Audit Fees” above in the year ended December
31, 2007 and the period ended December 31, 2006.




c.
Tax Fees. Fees billed for tax services for the year ended December 31, 2007 and
the period ended December 31, 2006 were approximately $2,562 and $3,000
respectively.




d.
All Other Fees: Aggregate fees billed for services other than those described
above were approximately $9,193 in the year ended December 31, 2007. These fees
were primarily for review of our Forms S-8 and SB-2.




AUDIT
COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES




The
Company’s Audit Committee has policies and procedures that require the
pre-approval by the Audit Committee of all fees paid to, and all services
performed by, the Company’s independent accounting firms. At the beginning of
each year, the Audit Committee approves the proposed services, including the
nature, type and scope of services contemplated and the related fees, to be
rendered by these firms during the year. In addition, Audit Committee
pre-approval is also required for those engagements that may arise during the
course of the year that are outside the scope of the initial services and fees
pre-approved by the Audit Committee.




Pursuant
to the Sarbanes-Oxley Act of 2002, the fees and services provided as noted in
the table above were authorized and approved by the Audit Committee in
compliance with the pre-approval policies and procedures described
herein.


















SIGNATURES




In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.








BLUEFIRE
      ETHANOL FUELS, INC.By:
            /s/
      Arnold R. KlannArnold
      R. Klann,President
      and Chief Executive Officer (Principal Executive
    Officer)By:
            /s/
      Christopher ScottChristopher
      ScottChief
      Financial Officer (Principal Financial Officer and Principal
      Accounting Officer)




In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.




Signature
            
            Title
            
            Date/s/
      Arnold R. Klann
            
            Director
      and Chairman of the Board;
            
            February 28,
      2008Arnold
      R. Klann
            
            President
      and Chief Executive Officer/s/
      Necitas Sumait
            
            Director,
      Secretary and Vice President
            
            February 28,
      2008Necitas
      Sumait/s/
      Chris Nichols
            
            Director
            
            February 28,
      2008Chris
      Nichols/s/
      Joseph I. Emas
            
            Director
            
            February 28,
      2008Joseph
      I. Emas/s/
      Victor H. Doolan
            
            Director
            
            February 28,
      2008Victor
      H. Doolan
















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